Enterprise Products Partners (NYSE:EPD) has shown strong growth over the last few months, and it has outshone most of its peers. The unit performance has been strong since the start of the year, and EPD is up over 17%. The partnership is spending considerable capital to build assets - EPD has recently completed one of its high-yielding pipeline systems, which could substantially increase its operational capabilities. Moreover, with the continuous shale discoveries and increasing oil yields, U.S. energy supply is going to exceed the demand in the coming years. As a result, export potential exists for the U.S. energy companies.
New Seaway Pipeline System
EPD recently announced that it has completed the "mechanical phase" of its New Seaway Pipeline System, which is a 512-mile crude oil pipeline running from Cushing, Oklahoma to the Jones Creek facility, Houston area. The new pipeline system is a twin loop project, co-owned by EPD and Enbridge (NYSE:ENB), that provides storage and terminal facilities in the Houston region near Freeport. The project will substantially add to the operating capabilities of the partnership, and is expected to double the Seaway System capacity to 850,000 barrels per day - operational by the end of this year. Previously, the Jones Creek facility was connected to EPD's ECHO crude oil storage facility in Houston by a 36-inch pipeline covering an area of 65 miles.
In addition to the pipeline system that transports crude oil from Cushing to the Gulf Coast, the Seaway Pipeline system comprises of a terminal and distribution network originating in Texas, which serves refineries locally and in the Houston area. The pipeline expansion will now suffice more customer needs at their disposal and considerably increase the operating cash flows of the partnership in the long run. Moreover, EPD is also proposing to build 1,200 miles pipelines from the resource-rich Bakken Shale formations from North Dakota to Oklahoma by 2016, which will further increase the operational capacity of the Seaway system.
Condensate Export will Prove to be Beneficial for EPD
The New Seaway Pipeline system also comes on-line at the right time for EPD, with the recent condensate oil export approval from the U.S. Commerce Department. The U.S. government cleared the way for the first exports of oil condensate over the past four decades. The ban has its roots in the Arab oil embargo in the 1970s, which restricts shipments of raw crude and condensate oil. This permission is granted to allow energy companies to take substantial benefits from the shale boom and the geopolitical natural resources crisis in the world. Talking a bit about condensate, it is a type of ultra-light oil that is flowing in huge quantities out of shale plays, mostly in the form of gas but it condenses into a liquid when brought to the surface, from Texas to Pennsylvania region.
The condensate export approval initially includes only two companies: Pioneer Natural Resource (NYSE:PXD) and EPD, to ship ultra-light oil. The buyers could then turn the oil condensate into several petrochemical variants, such as gasoline, jet fuel and diesel. The initial approval of the two companies for the condensate export will give them a substantial benefit over others, as they have a first-mover advantage; however, other companies have also requested the Commerce department to encourage similar approvals, and the Commerce department is now working on industry-wide guidelines to make U.S. oil exports easier.
As the U.S. crude export ban softened, the approved companies are eagerly searching their prospective foreign buyers in order to increase their international customer base. The increasing global demand of oil and gas has lessened the search and enabled EPD to find its first international customer just after one week of export ban removal. The partnership has sold its first condensate cargo to a Japanese trading house, and is seeking more customers in Latin America. According to Reuters, Japanese trading house, Mitsui & Co. Ltd. bought a 400,000 barrel U.S. condensate cargo from EPD, which is expected to be delivered by the end of this month or in early August. The demand of ultra-light condensate oil in the Asian region is comparatively higher than the rest of the world, and the expected disposal could reach up to 300,000 barrels each day by the end of this year. However, EPD has also offered to sell condensate for export in the huge Latin American market, where companies could use it as a substitute for naphtha to lighten local heavy crude.
Potential Threats and Opportunities
The export ban removal has enabled the U.S. companies to reach the huge global market for light, gasoline condensate; however, the Middle East dominates the condensate supply market in the Asian region, which could be a threat for the American oil companies. Iran and Qatar jointly export around 760,000 barrels per day, and account for about half of the global condensate supply, with majority of customers in the Asian region. Moreover, importers like China, Japan and South Korea have built huge processing plants known as splitters, which turn condensate into naphtha and other petrochemical variants. These splitters managed to process up to 900,000 barrels per day of condensate oil in the Asia-Pacific region. The rising supply from the Middle East, Australia and Africa could be a serious threat for the American condensate exports in the high-margin Asian region.
However, as the gasoline demand is rising, production from existing exporters is falling short of the demand. The increasing domestic demand is slowing down oil exports in Qatar. Moreover, the newly discovered petrochemicals in Australia are drier than before, which are unable to match the export standards. Further, the increased export sanctions on Iran have already restricted the oil and gas supply from the region. This situation could be beneficial for the American oil producers, which can fill the gap in the continuously decreasing supply in the Asian region. EPD, being the first exporter of the U.S. condensate, could take substantial benefits from the region.
The prospect of exports as well as the expansion of the pipeline will considerably enhance the revenues and operating cash flows of the partnership. EPD has allocated its capital expenditures very wisely, and the partnership's asset base is quite strong. We believe EPD will be able to grow its cash flows substantially and reward its unitholders in the shape of higher cash distributions. Furthermore, we expect the unit to continue its impressive upward movement on the back of solid growth in fundamentals.
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