Focus on Eagle Ford
Exploration and production companies are benefiting from the abundant varieties of commodities produced in the Eagle Ford shale. Increasing production volume also provides an opportunity for midstream operators to increase the transportation and processing capacity. Plains All American Pipeline (NYSE:PAA) has positioned itself to benefit from the growing production in the Eagle Ford area by investing in two projects in the region.
Plains All is investing approximately $120 million in the Eagle Ford projects in an attempt to augment its NGL fractionation capacity. It will construct a new natural gas liquids (NYSE:NGL) fractionator and expand its condensate stabilization facility. The site of the fractionator is located near the company's existing assets in Gardendale, which is close to the rail and truck loading and unloading facilities. This fractionator will treat and fractionate NGL sourced from Plains All's South Texas facility and throughout the Eagle Ford region. It is expected to be operational in the second quarter of 2015, with a capacity of up to 15,000 barrels per day (bpd).
Additionally, Plains All will enhance its truck and rail infrastructure to facilitate the loading, unloading, and transportation of NGL and purity products. It is adding a storage facility with a capacity of storing 80,000 barrels of these products. Plains All will also add a condensate stabilization train, which will add 40,000 bpd of incremental capacity to the company's existing 80,000 bpd of condensate stabilization capacity. The NGL fractionator is supported by long-term third party commitments, which bodes well for Plains All's future growth. NGL prices have hovered around the $40 per barrel mark over the last six months and crossed the $45 per barrel mark this month. This fractionation capacity addition could result in an additional revenue opportunity of over $200 million on an annual basis for Plains All.
Augmentation of NGL fractionation infrastructure by Plains All is a clear move to take advantage of growing NGL production in the Eagle Ford region. NGL production volume in this region increased 95.8% annually in 2012 and is forecasted to further increase 70% in the two-year period from 2012 to 2014. In order to address the growing NGL production in the region, Enterprise Products Partners (NYSE:EPD) has also increased its NGL fractionation capacity. Enterprise Products added two new NGL fractionators in the second half of 2013 at its Mont Belvieu facility in Texas, enabling it to address the growing NGL production in the region. These two NGL fractionators, frac VII and frac VIII, are part of a joint venture of Enterprise Products with Western Gas Partners (NYSE:WES). Enterprise Products has 75% interest in the joint venture, and the remaining 25% interest is with Western Gas. The eighth fractionator has added 85,000 bpd of fractionation capacity at this facility. Hence, while Plains All is investing in the NGL fractionation project that will augment its current NGL fractionation capacity by about 7.2%, Enterprise Products has added approximately 7.5% of NGL fractionation capacity through the eighth fractionator at Mont Belvieu. Plains All's revenue from NGL marketing operations increased in the first nine months of 2013 compared to the first nine months of 2012. Hence, increased NGL fractionation capacity is likely to help Plains All's revenue growth.
The Permian will drive future growth
While Plains All is well positioned at the Eagle Ford, what is the company up to in the Permian Basin? Crude oil production in the Permian basin averaged 1.32 million bpd in 2013 and is forecast to grow more than any other region in the U.S. through 2015. The consensus estimate is that by 2018 oil production in this region will be 2 million bpd. In order to keep pace with this growing production, Plains All has decided to increase its Permian Basin pipeline infrastructure. The company will invest $400 million to $500 million in four pipeline projects that are expected to come into service in 2014 and early 2015.
These four projects will add 700,000 bpd to 840,000 bpd of pipeline capacity through expansion and new projects. This could result in an augmented takeaway capacity of about 143% (at midpoint) over the company's current capacity of 540,000 bpd at the Permian Basin Area system. Getting additional crude oil transportation capacity at the Permian Basin is also important for Plains All as it accounts for more than 15% of the average daily volume of crude oil transported by pipelines. At the current segment profit margin of $0.52 per barrel, this additional takeaway capacity can result in a profit of $400,400 per day, or approximately $146 million per year, for the transportation segment. Thus, it is evident that Plains All can witness long-term growth as a result of the booming oil production in the Permian.
Surging oil and liquids production in the U.S. resulted in companies increasing their fractionation capacity and increasing the storage and takeaway capacity to facilitate the producers. The Permian basin and Eagle Ford are among the top producers in the U.S., and companies having assets in this region can be expected to benefit significantly in the future. Plains All is in a position to take advantage of the growing production with its projects in these areas. These projects are expected to drive the company's future growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.