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Enterprise Tracks Organic Growth in Onshore Gas Systems

February 8, 2010
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Enterprise Products Partners LP (EPD), which became one of the largest publicly traded midstream partnerships in the country after it merged last year with related entity TEPPCO Partners LP, stands ready to provide natural gas producers with the infrastructure they need to process and transport their production, CEO Michael Creel said last week.

The Houston-based partnership reported that net profits in 4Q2009 soared from a year earlier to $406 million (60 cents/unit), versus $228 million (43 cents). Creel helmed a conference call last Monday to discuss EPD's and related entity Duncan Energy Partners LP earnings.

In the Eagle Ford Shale gas play in South Texas, EPD "sees opportunities in all areas, including the dry and the rich gas, and we are looking at developing our system into a dry system and a wet system to accommodate those streams," he told financial analysts. "But also crude and condensate to the extent that we can attract producers. We certainly have assets that we think are in the right position. We are ready, willing and able to spend money to expand the system to accommodate their needs."

EPD and Duncan Energy Partners together are firming up contracts to expand capacity of their recently announced Haynesville Extension, a nearly 250-mile pipe into northwestern Louisiana that would carry 2.1 Bcf/d (see NGI, Nov. 2, 2009). EPD Chief Commercial Officer Jim Teague told analysts that "all the contracts that we have in place with the seven different producers are 10-year agreements. All demand charges with very little commodity, more the intrastate model, it is about 98% demand, 1% or 2% commodity-related. But they are all 10-year firm agreements."

The extension is proceeding on time and below cost, Teague said. "As far as controlling the costs, we have all the steel bought at this point in time. We just bought the last segment of steel here last week, in fact. Prices came in surprisingly under what we expected...So our steel prices were all locked in, and we were very happy with what our price of steel is. We have got the engineering contractors, the right-of-way contractors...We have not yet bid out the actual construction insulation. We will be doing that as the year goes on and obviously trying to get some fixed-price costs on those."

In 4Q2009 EPD's natural gas liquids (NGL), crude oil, refined products and petrochemical pipeline volumes "were a record 4.3 million b/d, while NGL fractionation volumes and equity NGL production were a record 477,000 and 120,000 b/d respectively," said Creel. "Our natural gas pipeline systems continued to run at near record levels of 11.5 trillion Btu/d."

Most of EPD's "significant assets" generated year/year growth, said the CEO. "Generally, this growth was supported by the overall improvement in economic activity in the United States and globally; strong demand for NGLs by the petrochemical industry as an attractive alternative to more costly crude oil derivatives; natural gas and NGL production growth in the Rockies; and the rebound of crude oil, natural gas and NGL production from the Gulf of Mexico, which had been severely impacted by the effects of hurricanes Gustav and Ike in the fourth quarter of 2008."

EPD's teams have made good progress in merging with TEPPCO businesses since the transaction closed last October, said Creed (see NGI, July 6, 2009). "In addition to the $20 million of public company and redundancy cost savings that we estimated at the time of the merger, we have already taken steps to capture approximately $35 million per year of opportunities to either increase revenues or reduce expenses that had not been previously identified."

No more acquisitions are planned in the short term, said the CEO.

"For the foreseeable future we have great opportunities to deploy capital to expand our integrated midstream system, including 48,000 miles of pipeline through organic growth," said Creel. "We believe organic growth will continue to offer greater returns on capital than acquisitions of discrete assets. Recently we were told there are 24 private equity teams chasing acquisitions in the midstream space. It sounds like the acquisition market is going to be expensive again and probably will rely on leveraged returns. We believe our focus on the organic growth available to us around our system and managing our cash cost of capital will continue to enable us to provide our partners with growth and distributable cash flow per unit.

EPD sees signs of a "long-term structural change in the petrochemical industry," said Teague, "because of the changes in the price relationships of crude oil, crude oil derivatives, natural gas and NGLs in the past year...Natural gas and NGLs enjoy a significant price advantage of more costly crude oil-derived feedstocks. This has been driven by a decline in global crude oil production, more acreage being off-limits to the private E&P [exploration and production] sector, geopolitical risk, growing demand for crude by China and other developing nations, the globalization of natural gas prices and more LNG [liquefied natural gas] facilities becoming operational...

"In my mind, most importantly, the technological breakthroughs around the development of natural gas shale plays in the U.S..."

But Enterprise is well positioned to help the U.S. chemical industry remain competitive "by providing reliable NGL feedstock supplies and services," said Teague. "We are planning for the future by increasing our frac capacity, expanding our natural gas pipeline and processing infrastructure and growing our distribution networks."

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