Energy Transfer Partners (ETP), recently received clearance for its LNG export project, and stands to benefit from this price differential, through export of natural gas to these markets. Export of natural gas liquids, or NGL, which is transported primarily as LNG, over long distances offers a unique arbitrage opportunity to domestic players in the U.S. While the natural gas prices hover at around $4 per million British thermal units in the US, it is priced three or four times higher in Asia.
Trunkline LNG Export is a wholly owned subsidiary of Energy Transfer Partners. Trunkline filed a Draft Resource Report with the Federal Energy Regulatory Commission, or FERC, for the Lake Charles LNG export project. Filing of this Draft Report clears the way for Trunkline to file formal applications for FERC authorization regarding the project. Following authorization, proposal requests for the project's construction are expected to be issued in mid-2014, and construction of the Lake Charles project is expected to begin next year.
The Department of Energy approved the Lake Charles LNG export project in August last year. This project is one of four projects that received approval last year, and the DOE has approved a total of five LNG export projects. It includes the construction of three liquefaction trains at the existing Trunkline LNG import terminal at Lake Charles, Louisiana. The DOE has authorized Energy Transfer to export up to 15 million metric tons per annum (mtpa) or 2 billion cubic feet per day, or bcfpd, of LNG to non-free trade agreement, or non-FTA, nations. Thus, this export facility will add capacity to the already existing import infrastructure at Lake Charles. This will help Energy Transfer take advantage of the differential pricing between natural gas in the U.S. and in non-free trade agreement nations, like China and Japan.
The LNG export market has also caught the attention of major oil and gas player ConocoPhillips (COP). The DOE approved the Freeport LNG project, where ConocoPhillips has 50% ownership of the General Partner, to export LNG to non-FTA countries early last year. This project, which had a previous approval to export LNG to FTA nations, received two approvals to export LNG to non-FTA nations last year. The first approval was to export 1.4 bcfpd of LNG to non-FTA nations, and the second approval, given in November, allows an export of up to 0.4 bcfpd to these nations. Thus, the Freeport project now has approval to transport 1.8 bcfpd of LNG to non-FTA nations and take advantage of the differential pricing.
Augmenting NGL production capacity
Energy Transfer has also augmented its NGL fractionation capacity at its NGL fractionation plant in Texas. The Lone Star NGL is a joint venture between Energy Transfer (70% interest) and Regency Energy Partners (RGP) (30% interest). In the fourth quarter of 2013, Lone Star initiated a second NGL fractionator into service at its Mont Belvieu NGL fractionation facility in Texas. This second fractionator is known as the Lone Star Frac II, and it has a NGL fractionation capacity of 100,000 barrels per day. With this fractionator coming online, the project's fractionation capacity at Mont Belvieu has doubled. The source of NGLs for these twin fractionators includes Energy Transfer's Justice NGL pipeline and Lone Star's West Texas NGL pipeline. The increased capacity will also help the partnership address its objective of increasing unit holder value.
Improving NGL fractionation is important for Energy Transfer because it has a positive impact on the company's adj. EBITDA. In the following table, the adj. EBITDA for Energy Transfer over the last three years and the increasing contribution of NGL Transportation segment can be seen.
NGL Transportation Segment Contribution
TTM - Trailing Twelve Months up to the third quarter 2013
The NGL Transportation & Services is a new segment that Energy Transfer added to its portfolio in 2011. This has contributed to the company having a stronger and diversified platform and has created a new source of earnings. From the above table, it is clear that the adj. EBITDA has grown, driven by the improving contribution from the NGL transportation & Services segment. Thus, the NGL fractionation capacity addition in the fourth quarter should help further improve Energy Transfer's adj. EBITDA.
Energy Transfer Partners has positioned itself to benefit from LNG export in the future, as well as taken steps to augment its NGL fractionation capacity at Mont Belvieu. The company has also benefited by focusing on fee-based projects, which reduce its exposure to commodity price fluctuations. This allowed the company to raise its quarterly distribution by 1.26% in the third quarter last year. Going further, Energy Transfer should be considered by investors for its robust dividend yield of 6.8%.