- Mismatch between the domestic demand and supply of NGLs has opened the door for exports.
- The demand in the global markets remains strong and the companies will need to export to match the growing supply.
- Phillips 66's investments in the segment will position it nicely to exploit the growth opportunity.
Phillips 66 (NYSE:PSX) has been performing well and the stock has gained more than 14% over the last twelve months. The company is diversifying its products mix and the export potential in the NGLs will be the major growth driver for the company. Phillips 66 is making investments in the segment, which should bring substantial rewards for the company over the next 3-5 years. The demand for the NGLs is falling in the domestic market; however, it remains robust in the global markets. As a result, the companies are focusing on the export potential of these products. In this article, we will focus on the NGLs market and the company's investments in the segment.
NGLs Economic Conditions
The recent boom in NGL demand, both local and global, had led the suppliers to increase production in order to take advantage of the favorable pricing trend in the market. As a result, the domestic market is facing the prospect of over-supply of NGLs, and some fear the fate of this segment might be similar to the natural gas after the shale revolution. As early as January, we saw Propane hit $5/gallon due to the extremely cold weather. However, at the same time, Ethane was selling for ($0.50)/gallon - meaning that the seller was paying the buyer to buy Ethane. The prices for Propane are expected to remain in control as the local supply will be divided into the local consumption as well as exports. The production of the natural gas liquids is on the rise and we cannot always count on a colder weather - the companies will need to balance the demand and supply by exporting as the local market cannot absorb all the NGLs produced in the country. The demand for these products in the international markets remains high and these manufacturers can benefit substantially by exporting Propane and Butane to the global markets.
Phillips 66 to focus on Liquid Petroleum gas
Phillips 66 is now concentrating on a single sub product of NGL, Liquid Petroleum Gas. This gas is merely propane and butane which are used as a source of energy in many countries. It is also used as an alternative transport fuel in some countries. For this reason, the global demand of propane still remains healthy.
Phillips 66 intends to capitalize on this opportunity by building a new fractionator which would mainly focus on propane and butane. This project is part of the $3 billion investment the company is undertaking in order to meet the global demand of NGL, which could double by 2020. Furthermore, the company is reconfiguring its export terminal 30 miles away from this fractionator to decrease the transport cost.
The fractionator is expected to be functional in the second half of 2015 while the export terminal would take about another year to be ready. This project would allow the company to have a capacity of exporting 150,000 barrels of NGL per day. Currently, U.S has the capacity to export 400,000 barrels of NGL per day. Industry experts believe that this figure could grow to 1.5 million barrels per day through 2016. Phillips 66 accounts for 10% of this additional capacity and is well positioned to capitalize on the export of Liquid Petroleum gas.
Moreover, the company is also considering building a splitter near its 247,000 barrels per day Sweeny refinery, Southwest of Houston. In addition, a second fractionator is also being considered in Sweeny area. Currently, the refining business is one of the most high-margin businesses in the oil and gas sector. The company is positioning itself very nicely in order to take advantage of the opportunity present in the global markets. Refining business is a cash cow for the company and it can finance its endeavors in other segments. The company is also using its limited capital wisely by diversifying into business segments. We believe that this will minimize the future risk of the company.
Phillips 66 has been performing well since its separation from ConocoPhillips (NYSE:COP), and there is still room for its refining business to grow. However, the main growth will come from the NGLs and the transportation of these energy assets. Looking at the proposed investments, we believe the company is well positioned to benefit from the booming global demand for NGLs. As a result, the stock price of the Phillips 66 should follow the growth in its fundamentals.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.