Production from shale plays — natural gas, natural gas liquids (NGL) and crude oil — lifted Enterprise Products Partners LP to record quarterly earnings during the third quarter. The company remains bullish on supply of and demand for NGLs and Tuesday announced the anchor shipper on a landmark project that would carry ethane from the Marcellus Shale to the Gulf Coast.
“Enterprise reported record results again this quarter driven by natural gas, NGL and crude oil production growth in the shale regions, as well as demand for NGLs by the U.S. petrochemical industry and global markets,” said CEO Michael A. Creel. “Our NGL pipelines and services segment posted record gross operating margin this quarter, while our onshore natural gas, onshore crude oil and petrochemical service businesses also had strong results.
Enterprise reported record gross operating margin of $973 million, record adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) of $956 million and record net income of $480 million for the third quarter, compared with gross operating margin of $809 million, adjusted EBITDA of $838 million and net income of $348 million for the third quarter of 2010.
Chesapeake Energy Corp. has stepped up to be the anchor shipper on the partnership’s proposed pipeline to carry ethane from the Marcellus and Utica shales to the U.S. Gulf Coast. The pipeline, which would use existing and new infrastructure, would link what are arguably the most promising liquids-rich gas plays with the nation’s traditional ethane marketplace.
Chesapeake claims the distinction of being the most active driller and largest leaseholder in the Marcellus and Utica. The company committed to supply 75,000 b/d of production over a five-year ramp-up period, said Chesapeake’s James Johnson, senior vice president of marketing. “We view providing a major commitment in support of this project as an important step toward obtaining premium pricing for the significant volumes Chesapeake will produce from this resource,” Johnson said. The producer has the option to take additional capacity.
An open season for the project is under way through Nov. 10 (see Daily GPI, Oct. 12).
“We’ve been laying the groundwork for this project for a while now, and we believe new developments continue to point to the growing strategic importance of this project to both the Northeast producer community and Gulf Coast petrochemicals,” Enterprise COO Jim Teague told financial analysts Wednesday during a third quarter earnings conference call. “Producers continue to not only beat expectations in the Marcellus but recently also announced impressive acreage positions and drilling intentions for the nearby Utica, which is also expected to be rich in NGLs.”
Teague said Enterprise’s “conservative estimate” is that more than 400,000 b/d of incremental ethane supply will be needed for ethylene expansions, debottlenecking and plant feedstock conversions over the next several years. Much of the expansion and conversion demand is expected to be created over the next 12-36 months, he said, as petrochemical companies increasingly turn to domestic ethane over naphtha, for instance. “We have also built facilities to serve the petrochemical industry on the Gulf Coast as it continues to expand its demand for price-advantaged domestic ethane to displace more expensive imported crude oil derivatives,” said Enterprise CEO Michael Creel.
“On the demand side, petrochemical companies continue to be focused on significant expansions in the U.S. because of the favored feedstock costs from growing shale reserves, primarily ethane. We believe these Northeast NGLs are now key to realizing the growth potential for the Gulf Coast-centric petrochemical industry,” Teague said.
In a research report released late last month Wells Fargo Securities analyst Michael Blum and his team reaffirmed their outlook for continued support for ethane prices during the fourth quarter and into next year due to a faster-than-expected pace of feedstock conversions. “However, our outlook for ethane pricing during the intermediate term (i.e., 2013-2015) is less positive as midstream companies appear to be adding fractionation capacity (i.e., leads to incremental ethane supply) at a significantly faster rate than petrochemical companies are building out ethane cracking capacity (i.e., leads to incremental ethane demand),” the Wells Fargo analysts said.
Asked during the earnings call whether an ethane supply glut is in the making, Teague said there will be enough demand to absorb supply as it comes online.
“We see several opportunities created by petrochemicals preferring ethane, additional supply, and we’re working those opportunities,” Teague said. “Frankly at this point, I really don’t see a situation where we’re going to get the supply long relative to demand. A lot of that is due to the ramp of the production. If it all hit at once, yeah, you may have a window [of oversupply], but that’s not how it’s going to be.”
Enterprise has about $4.5 billion of energy infrastructure projects that are scheduled to be put into service between 2012 and 2014, the partnership said.
During the third quarter, gross operating margin for the NGL pipelines and services segment was a record $548 million, a 38% increase compared with $397 million for the corresponding quarter of 2010. Gas processing and related NGL marketing generated record gross operating margin of $348 million for the third quarter compared with $224 million for the third quarter of 2010, primarily due to an increase in NGL sales margins and gas processing margins. Processing plants in the Rocky Mountains and South Texas also benefited from an increase in fee-based volumes. Enterprise reported a 40% increase in fee-based processing volumes to a record 3.8 Bcf/d for the third quarter, compared with 2.7 Bcf/d for the third quarter of 2010.
Gross operating margin from the NGL pipeline and storage business was $146 million in the third quarter, compared with $136 million in the third quarter of 2010. The Mid-America and Seminole pipeline systems reported a $15 million increase in gross operating margin, primarily due to an increase in systemwide tariffs that was effective in July.
The NGL fractionation business reported record gross operating margin of $54 million for the third quarter, compared with $38 million for the corresponding quarter of 2010. The partnership’s Mont Belvieu, TX, fractionators accounted for $10 million of this increase in gross operating margin, largely due to volumes and revenues associated with a new fractionator that began operation late in the fourth quarter of 2010. Enterprise’s Norco, Hobbs and South Texas fractionators also reported increases in gross operating margin. Fractionation volumes for the third quarter increased 16% to a record 554,000 b/d compared with 476,000 b/d in the third quarter of 2010.
The onshore natural gas pipelines and services segment reported gross operating margin of $156 million for the third quarter, compared with $154 million for the third quarter of 2010. Gross operating margin from the Texas Intrastate system increased $15 million on an 11% increase in pipeline volumes attributable to growing production from the Eagle Ford Shale and greater demand from gas-fired electric generation facilities due to record heat in Texas during the third quarter. Total onshore gas pipeline volumes increased 0.7 trillion Btu/d, or 6%, to a record 12.4 trillion Btu/d for the third quarter of 2011.
Gross operating margin for the offshore pipelines and services segment was $54 million for the third quarter of 2011 compared to $68 million for the same quarter of 2010. The 2010 amount included an $8 million benefit related to insurance proceeds.
The Independence Hub platform and Independence Trail pipeline reported a $3 million decrease in aggregate gross operating margin to $34 million for the third quarter from $37 million for the third quarter of 2010. Gas volumes on the Independence system were 429 billion Btu/d for the third quarter, compared with 489 billion Btu/d for the third quarter of 2010. Total offshore natural gas pipeline volumes (including those for Independence Trail) were 1 trillion Btu/d for the third quarter, compared to 1.1 trillion Btu/d for the third quarter of 2010.
“This segment continues to be impacted by lower exploration and development activity in the Gulf of Mexico due to federal regulatory issues,” Enterprise said. “We expect to receive additional volumes into our offshore natural gas and crude oil pipelines in the fourth quarter of this year associated with the initial production from a new well and the restart of other wells that were down for recompletion or facility maintenance.”
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