Energy transfer ups permian bet – energy transfer equity, l.p. (nyse ete) seeking alpha power energy definition


The widening WTI-Midland differential for crude oil prices is a major concern for upstream Permian players. Even more concerning is the possibility of having to shut-in existing production to not run afoul of gas flaring laws, particularly in Texas, as flaring is usually allowed for only a limited period of time. Surging associated gas production out of the Permian Basin has put a tremendous stress on regional infrastructure and local gas benchmarks clearly reflect that. Energy Transfer Partners L.P. ( ETP) and its general partner Energy Transfer Equity L.P. ( ETE) are actively trying to combat this problem as a way to generate cash flow growth that will enable much better coverage of its distribution payments to investors.

In order to build up an extensive portfolio of potential oil & gas midstream developments, Energy Transfer Partners L.P. and Energy Transfer Equity L.P. have to be quick and bold. Wait around too long and other midstream firms will take those opportunities away. By taking advantage of strong macro tailwinds, in theory anyway, Energy Transfer Partners L.P. and Energy Transfer Equity L.P. should be able to keep growing into the 2020s. Let’s dig in. Brief overview

If you follow the oil & gas space, you’ve probably heard about the Permian boom. However, let’s put some numbers to the hype. Baker Hughes ( BHGE) noted that as of early May 2018, there were 483 rigs active in the Permian Basin. That was up 30% year over year, and keep in mind rigs are drilling wells faster than ever. Gas production out of the Permian region is up ~2.5 Bcf/d from year-ago levels, according to the EIA as you can see below.

Those gains show no sign of slowing down. From April to May of this year, Permian gas output rose by 0.222 Bcf/d to 10.273 Bcf/d. Further complicating the midstream picture is the enormous DUC, drilled but uncompleted, well inventory in the Permian. Upstream players had 3,044 Permian DUCs at the end of March, 40% of the total DUC inventory in America.

Sure, rosy growth projections should always be taken with an enormous grain of salt, but when it comes to the Permian, this is a growth story you can believe in. DUCs can be quickly turned online, indicating that even if drilling activity slowed down, production could continue to climb ever higher as market conditions allow. Why not make money off of an existing asset?

As I’ve said many times in the past, a pipe in the ground is worth ten on the drawing board, especially when that pipeline can quickly be reactivated, which appears will be the case with the Old Ocean Pipeline. Energy Transfer Partners L.P. and Enterprise Products Partners L.P. ( EPD) each own 50% of the Old Ocean gas pipeline, a 240-mile system that runs from Maypearl, TX, which is near Dallas, to Sweeny, TX, which is near Houston along the coast.

The JV shut down the Old Ocean Pipeline back in 2012, but the need for additional Permian gas takeaway capacity prompted the venture to restart operations. Energy Transfer Partners is the operator of the endeavor and expects the Old Ocean can be restarted by the end of June 2018. This pipeline has ~160 MMcf/d of natural gas transportation capacity. Making that possible

Investors should note that a key component of this plan rests on the expansion of the existing North Texas gas pipeline system, which will enable an additional 160 MMcf/d of natural gas to run from West Texas to the Old Ocean gas pipeline. Those incremental volumes will then flow down to the coast, where numerous pipeline connections will enable that gas to find an end buyer. Rising pipeline exports to Mexico and liquefied natural gas exports along with rising domestic gas consumption is key, with an eye on rising demand from petrochemical, utility, and other industrial buyers in America.

Energy Transfer’s North Texas gas division system consists of 160 miles of gas pipelines, one major gas processing complex with 700 MMcf/d of capacity, and a natural gas conditioning plant with 100 MMcf/d of capacity. As that system caters to Barnett shale production, which has been in terminal decline for some time, there is excess capacity for Energy Transfer to utilize. Expanding gas processing capacity

In order to make the gas that flows along the North Texas and Old Ocean gas pipeline networks marketable, that natural gas must first be run through a cryogenic processing plant. That plant separates out the ‘wet’ gas products (natural gas liquids like butane, propane, ethane, and natural gasoline) from the ‘dry’ gas product (marketable gas, methane), enabling upstream firms to get the best realizations for their production. From Energy Transfer’s perspective, that gives the midstream family another growth avenue.

Management announced that Energy Transfer had completed the 200 MMcf/d Rebel II gas plant at the end of April, which is near the existing Rebel plant. When fully operational, Energy Transfer’s gas processing capacity will climb up to ~1.2 Bcf/d in the Permian Basin area. Another cryogenic processing plant is on its way, as Energy Transfer is moving ahead with the expansion of its Arrowhead complex. The Arrowhead II plant is expected to be completed by year-end.

Part of this strategy involves building an 80-mile gas pipeline from its Orla gas plant to the Waha Hub to ultimately provide additional takeaway capacity for Permian gas production. The Red Bluff Express Pipeline is supposed to be operational in May. Management plans to add another 20 miles to the system, which will have 1.4 Bcf/d of transportation capacity, with that expansion due to be completed in 2H 2019. All of that capacity is protected by long-term contracts.

As takeaway capacity at the Waha Hub is already stressed, this project needs to be viewed in connection with the other developments Energy Transfer and its peers are actively moving forward with. More takeaway capacity is on its way and Energy Transfer wants to make sure it is ready.