Enterprise Products Partners’ Q4 2009 results were highlighted by a 42% increase in revenue to US$8.4 billion and a 78% increase in net income to $406 million due to record natural gas liquid (NGL), crude and petrochemical volumes that it transported, as well as record equity NGL production and fractionation volumes and increased volumes of natural gas it transported.

“Higher natural gas processing margins increased demand for NGLs as a petrochemical feedstock over more costly crude oil derivatives, profits from NGL sales that were completed in the fourth quarter … and demand for our NGL export facilities were among the key drivers. Fundamentals continue to be strong for the segment as we began 2010. Industry NGL inventories are low, particularly ethane, and demand continues to be highly resulting in strong natural gas processing margins,” Mike Creel, president and chief executive officer, said during a conference call to discuss Q4 2009 earning.

Jim Teague, the company’s executive vice president and chief commercial officer, remarked that the petrochemical industry was consuming ethane inventories faster than the U.S. NGL segment could produce.

“We believe changes in the price relationships of crude oil, crude oil derivatives, natural gas and NGLs in the past year have led to a long-term structural change in the petrochemical industry. Natural gas and NGLs enjoy significant price advantage over more costly crude derived feedstocks.

“This has been driven by a decline in global crude oil production, more acreage being off-limits to the private E&P sector, geopolitical risk, growing demand for crude by China and other developing nations, the globalization of natural gas prices and more LNG (liquefied natural gas) facilities becoming operational and, in my mind, most importantly, the technological breakthroughs around the development of natural gas shale plays in the U.S.,” Teague said.

Teague added that he anticipated propane and ethane would continue to be the most profitable petrochemical feedstocks in 2010. U.S. producers also benefited from a weak U.S. dollar on the international front as U.S. production was the most cost effective for many international ethylene crackers.

Enterprise Products Partners’ liquefied petroleum gas (LPG) export terminal on the Houston Ship Channel also benefited as these crackers imported LPG to traditional naphtha crackers. This resulted in the terminal exporting roughly 3 million barrels per month of LPG, primarily propane, since July.

While new ethylene capacity in the Middle East has been mentioned as possibly cutting into the U.S. price advantage, Teague stated that this added capacity has its own disadvantages compared to U.S. production.

“A significant amount of propane and heavier feedstocks, primarily natural gasoline, will be used by the Middle East crackers. Those feeds are actively exported and are valued to those Middle East crackers based on international pricing. As a result, Middle East propane feedstock costs are significantly higher than cracking standard ethane and are nearly at a parity with U.S. ethane cracking economics,” he said.

“Middle East production will undoubtedly affect U.S. crackers but we believe the cost advantage of cracking live feedstocks, return of domestic demand growth and our continued competitive position in the international marketplace will keep U.S. ethylene production steady to growing over the coming years,” he added.

One of the biggest impact on the company’s results in the quarter was due to the completion of the $3.3 billion merger with TEPPCO (see Gas Processors Report 10/30/09). This merger resulted in savings of nearly $20 million due to synergies created from the elimination of redundant public company costs Creel said.

“In addition, we’ve taken action to capture approximately $35 million per year of opportunities. These increased revenues or reduced expenses that have not been previously identified, including revising tariffs on the Enterprise refined products pipeline system, electing to process certain volumes of natural gas from the Val Verde system [in northern New Mexico] and realizing lower interest costs on the $1.1 billion of best we issued in October of last year,” he said.

He also stated that the merger will continue to benefit the company as it identifies more areas and systems to expand. This includes expanding its current pipeline system by 48,000 miles through organic growth projects. “We believe organic growth will continue to offer greater returns on capital than acquisitions of discrete assets,” Creel said.

“Recently we were told there are 24 private equity teams chasing acquisition in the midstream space. It sounds like the acquisition market is going to be expensive again and probably we will rely on leveraged returns,” he continued. (For more on the topic of private equity entering the midstream, see Gas Processors Report 01/13/10.)

Teague said that new projects include a 75,000 barrel per day fractionator at Mont Belvieu similar to its Hobbs fractionator built in 2008. This facility is expected to complete by the end of the year.

The company is also building a 34-mile, 24-inch pipeline that will serve as the first segment of its east-west pipeline in the Eagle Ford shale, about which the company is very enthusiastic.

“The Eagle Ford is more than a natural gas play. It will have its share of NGLs, crude oil and condensate. Some of the gas will be extremely rich, averaging four to nine gallons of liquids per thousand cubic foot. This gas will need to be processed and NGLs will need to be fractionated and transported to market. We will be incrementally expanding our system to provide midstream services. The key will be to stay ahead of the producers who have had early success and, in some cases, are accelerating their drilling programs,” Teague said.

Randy Fowler, the company’s executive vice president and chief financial officer, added that Enterprise Products Partners is planning to develop a wet system and a dry system in the play to accommodate both streams, as well as separate crude and condensate streams. – Frank Nieto