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Enterprise: Ethane, Propane Stocks Will Be Worked Off

Currently growing inventories of ethane and propane are due to different factors and won't continue forever, Enterprise Products Partners LP COO Jim Teague said last Wednesday. Longer-term, the company remains bullish on the natural gas liquids (NGL) demand story in the U.S. Gulf Coast and beyond.

"We're going through a period of high inventory builds for both ethane and propane, which are currently influencing the pricing of each other," Teague told financial analysts during an earnings conference call. "While the reasons for the excess inventory levels are different, they have in common the large inventory builds that we believe are short-term in their nature. The first quarter saw well over 100,000 b/d of ethane demand lost due to extensive petrochemical outages on the Gulf Coast. Some outages were planned, some unexpected, and these outages have continued well into the second quarter. All that lost demand resulted in a short-term situation of growing ethane inventory in spite of some of the best cracking margins ever."

Like natural gas, propane saw weak demand last winter due to warmer-than-normal temperatures, and this led to builds in stocks. Now there is competitive pricing between ethane and propane as petrochemical industry buyers will swap one feedstock for the other based on price, Teague said.

"That said, we believe that ethane inventories will start drawing down in May as these [plant] turnarounds complete and some of these plants come back up with the capability of cracking even higher volumes. Additionally, merchant inventories will be further impacted in May as two large NGL fractionator outages at Mont Belvieu will result in somewhere around 100,000 b/d of lost ethane supply for at least a month," he said. "Looking beyond May...it's clear that petrochemical expansions and debottlenecks are proceeding as we expected due to the higher margins that come from cracking the lightest feedstock they can."

Enterprise NGL, crude oil, refined products and petrochemical pipeline volumes for the first quarter were 4 million b/d, which was 2% less than volumes in the first quarter of 2011. Total natural gas pipeline volumes increased 9% to 14 trillion Btu/d. NGL fractionation volumes increased 13% to a record 623 thousand b/d. Equity NGL production decreased 6% to 112,000 b/d, while fee-based gas processing volumes increased 12$ to a record 4.1 Bcf/d.

"Our NGL pipelines and services and onshore natural gas pipelines and services segments reported record gross operating margin on higher sales and natural gas processing margins; record fee-based natural gas processing and NGL fractionation volumes; and an increase in natural gas pipeline volumes from the Haynesville and Eagle Ford shale areas," said CEO Michael A. Creel. "Broadly, our integrated system of assets continued to benefit from production growth in non-conventional shale resource plays and from increased demand for NGLs by the U.S. petrochemical industry and international customers.

"During the remainder of 2012, we are scheduled to complete construction and begin commercial operations with respect to approximately $3 billion of organic growth projects that will generate new sources of cash flow for our partnership. In the Eagle Ford shale area of South Texas, the first 300 MMcf/d train of our Yoakum natural gas processing plant should begin commercial operations during May 2012. Natural gas and NGL pipelines and storage facilities that support the plant are also beginning operations.

"The second train of our Yoakum plant is scheduled to commence operations in July 2012. Each of the trains at the Yoakum facility has the capacity to produce approximately 30,000 b/d of NGLs. In addition, the first phase of our 450,000 b/d Eagle Ford shale crude oil pipeline is scheduled to begin service in June 2012. Additionally, we are on schedule to complete construction and begin reversing the flow on the Seaway Crude Oil Pipeline from Cushing, OK to the Texas Gulf Coast as early as May 17, 2012."

Enterprise income for the first quarter was $656 million versus $435 million for the first quarter of 2011. Net income for the first quarter of 2012 includes an income tax benefit of $47 million associated with the conversion of certain subsidiaries to limited liability companies and gains of $53 million from the sale of 26.3 million common units of Energy Transfer Equity.

Out of favor for now due to extremely week prices, natural gas will have its day again, Teague said. "...[N]atural gas has and will continue to provide us with opportunities both through its integration with our NGL assets on the supply side and what we believe are going to be significant increases in demand in Texas and the Gulf Coast for power generation and new industrial loads. While prices are currently depressed, producers are in the business to make money and they continue to work on getting their costs down and, more importantly, they'll continue to focus their efforts on rich gas and crude, leaving significant lean gas reserves on the shelf until prices recover."

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