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Enterprise's Teague: Ethane Bears Are Talking Their Book

With ethane prices down more than 30% in January alone, consumers and analysts on the consuming end of the ethane pipeline might be tempted to say the market is moving toward saturation. Not so, said Enterprise Products Partners COO Jim Teague; the bears are "talking their book.

"Now that a definitive, large-scale solution for the Marcellus-Utica ethane has been reached [namely Enterprise's proposed 125,000 b/d Appalachia-to-Texas (Atex Express) ethane pipeline (see Shale Daily, Jan. 5)], there have been many experts -- and in my script that's in quotes -- who are projecting an early and significant supply of ethane on the Gulf Coast," Teague told financial analysts during an earnings conference call Wednesday.

"At Enterprise we track supply-demand fundamentals, and I'm not going to ever jeopardize my credibility by saying that there won't be windows where ethane will be oversupplied, or for that matter, undersupplied. I will tell you that our models indicate that ethane is likely to stay in balance even after [the] Marcellus [pipeline] comes into service."

The real advantage of cheap ethane in the United States given the price spread between natural gas and crude oil is not that ethane is cheaper, it's the price spread to naphtha, Teague said.

"Just last week, for our models, ethylene from ethane cost 20 cents a pound less than ethylene from naphtha," he said. "On a 1.5 billion pound per year plant, that is an annualized $300 million dollars in margin. In addition, that ethylene from ethane is globally competitive. The cost advantage has not been and will not be ignored.

"When we talk about softness, we've gone from phenomenal margins to just great margins."

Since hitting a recent high of 91 cents/gallon in November, ethane has fallen 39% to 56 cents/gallon, including a 31% drop in January alone.

Analysts at Tudor, Pickering, Holt & Co. called that drop "largely temporary, in our view, but a useful indicator of how dynamic ethane markets can be and how quickly prices can move between effective price ceiling and effective price floor." A 50,000 b/d shortage in the 1 million b/d market this past year sent ethane prices to three or four times that of natural gas, they said.

The decline in ethane prices has been "largely due to transitory factors rather than a systemic shift in underlying fundamentals," wrote Wells Fargo Securities analyst Michael Blum in a note Tuesday. He attributed the softness to "unseasonably warm weather," planned ethane cracker turnarounds and reversion to fair value.

"By most accounts, Mont Belvieu ethane prices had reached unsustainable levels in October with spot prices trading as high as a 22% premium to our fair value estimate, which is predicated on supply and demand fundamentals," Blum wrote. "Hence, part of the 40% decline in ethane prices [since Oct. 18] may have been attributable to a reversion in price back to fundamentally supportable levels, in our view."

Theoretically, at least, there's still plenty of room for more ethane demand just from cracker conversions, Teague said. "I asked our fundamentals group to model the remaining naphtha and gasoil cracking at a time when we are showing growing ethane use," he said. "They found that the naphtha, gasoil cracking was still 230,000 b/d of equivalent ethane demand. That's probably not likely to be converted, but it gives you an idea of the size of the headroom.

"Don't underestimate the petrochemical industry's ability to consume ethane. The economics are compelling, to not only crack all the ethane they can, but as quickly as possible and to position themselves to be able to crack substantial amounts more in the years to come."

For 2011, Enterprise reported record net income of $2.1 billion; record earnings per unit of $2.38 on a fully diluted basis; record gross operating margin of $3.9 billion; and record distributable cash flow of $3.7 billion, which included $1 billion of cash proceeds from sales of assets. "We benefited from production growth in the Rocky Mountains, Haynesville and Eagle Ford shale plays, and from increased demand for NGLs [natural gas liquids] by the U.S. petrochemical industry and international customers," said CEO Michael A. Creel. "Our integrated system handled record or near-record volumes of liquids and natural gas, leading to another year of record financial performance."

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