Posted on 01/03/2014 5:23:39 AM PST by thackney
As America's energy story continues to develop, we are looking at three unmistakable opportunities for the midstream industry heading in to 2014. Today we examine the oil by rail, mergers and acquisitions, and export trends through the lens of four of the largest U.S. midstream companies: Energy Transfer Partners (NYSE: ETP ) , Enterprise Products Partners (NYSE: EPD ) , Kinder Morgan Energy Partners (NYSE: KMP ) , and Plains All American Pipeline (NYSE: PAA ) .
1. Oil by rail
Shipping oil by rail was a major trend in 2013, and there's no reason to think that will change in 2014. In fact, at least one administrator from North Dakota's Department of Mineral Resources thinks we may see 90% of the Bakken's crude oil leave the region on trains next year. As producers seek the highest price for their product, rail offers the flexibility needed to reach premium markets.
To that end, Plains All American definitely has one of the more significant rail footprints for a midstream company, and that footprint is growing. By 2014, the partnership will have two new rail facilities online -- one in Colorado and one in Virginia. It also has rail assets on the West Coast, Gulf Coast, in North Dakota, and Wyoming. Additionally, by the middle of the year, Plains expects its Bakersfield, Calif., rail terminal to be in service.
For its part, Kinder Morgan Energy Partners just announced that it will team up with Imperial Oil to construct a rail-loading facility outside Edmonton, Alberta. The new facility will have an initial capacity of 100,000 barrels per day, with potential to expand to 250,000 bpd down the road. Highlighting one of the advantages of shipping oil by rail is the in service date for the new facility: December 2014. A 50/50 joint venture, Imperial has already inked a long-term contract for the initial capacity at the facility; Kinder Morgan will be responsible for construction and operations.
2. M&A
During the past few months of 2013, more than one CEO has made comments about an uptick in merger and acquisition activity in the midstream space. Energy Transfer's Kelcy Warren was one such executive. In October, he told Bloomberg, "You're going to see the resumption of some kind of M&A strategy that we deliberately shelved for quite a period now," emphasizing that the fastest way to grow in his sector was via an acquisition.
Warren is certainly not alone in his thinking, and Energy Transfer will have its fair share of competition for assets. Plains All American, in particular, is one to watch. The partnership's most recent presentation makes perfectly clear that management is ready and willing to throw is hat in the ring if the right opportunity presents itself, elaborating that the "current market [is] very competitive" and "PAA will remain active but disciplined."
Plains has certainly positioned itself nicely for an acquisition. Its balance sheet is in such a condition that it could plunk down an estimated $1.5 billion and still remain within its targeted credit metrics, including substantial breathing room with its long-term debt-to-adjusted EBITDA ratio of 3.1 times. Management is targeting a ratio in the neighborhood of 3.5 to 4.0 times. Staying within that range assures Plains at least the opportunity to win an upgrade from the credit ratings agencies, another stated goal.
3. Exports
As the "will we, won't we" crude oil export story drags into 2014, our midstream operators will send plenty of natural gas liquids to foreign markets. Enterprise leads the way as the country's biggest player in the propane export business. The partnership envisions liquid propane exports upwards of 500,000 barrels per day next year, up from approximately 300,000 bpd this year. Demand for propane is weak at home, but growing globally, particularly in the Latin American and Asian markets. Enterprise's current low ethane propane export capacity sits at 7.5 million barrels per month.
Energy Transfer Partners is also getting on the LPG export bandwagon. The partnership is teaming up with Sunoco Logistics and Regency Energy Partners to integrate fractionators at the Mont Belvieu hub with a pipeline and terminal to the Gulf Coast, dubbed the Mariner South project. The venture will allow Energy Transfer to export propane, ethane, and butane. Though first exports aren't expected until 2015, important construction progress, as well as capacity ramp-ups on the fractionators, will take place next year.
Bottom line
The energy industry continues to transform at a rapid clip, presenting numerous opportunities for investors to cash in along the way. Undoubtedly, other trends will reveal themselves as 2014 moves along, but the three discussed here are already under way and are likely to accelerate next year based on the plans of the four companies we looked at today.
The railway part is, for the most part, political shenanigans. It’s cheaper to ship by pipe, over the long-term. It’s only because of payoffs to the politicians has it gone by rail.
Create a crisis, raise the price. Seems to be a recurring theme with the current criminal administration to help his donors...
Create a crisis, raise the prices. Seems to be a recurring theme with the current criminal administration to help his donors...
No doubt the pipe is cheaper but rail is already built.
And Obama didn’t give them a loan like he did to Solynda, A123, Fiskar, and his thugs.
And Warren Buffet owns BNSF.
Pipeline companies will build a new pipeline and recover the cost on the transportation fees. Oil companies pay lower fees to move the same oil to the same location when in a pipeline.
The rail makes sense when it goes to a congested area like the Northeast Coast where it isn't economically feasible to route a new pipeline in a congested area. Although sometimes it is done on rail and electric power right-of-ways.
Rail can also respond quicker to changes, but in the long run usually loses economically
Long term... that is the key to your statement. The people that would front the capital to construct any transportation infrastructure sweat bullets and hand-wring every second of the day over the WTI/Brent Light Sweet Crude spread... There is worry that at any second the market changes where crude goes to $30/bbl and that bringing crude to market will become a losing proposition.
There is not much "Long Term" when it comes to this sort of capitalization... we live in an era of just-in-time deliveries, and lean manufacturing and minimal warehousing for a reason.
With that in mind, it makes sense for a capitalist to invest his money in rail loadouts along existing tracks. This way when the boom ends, they can recover all the rail, turnouts, and even crossties and repurpose it somewhere else.
Shipping liquid petroleum products by rail is not the preferred way of doing it any way you look at it. It’s not efficient, and it’s certainly more prone to leaks/spills than a pipeline.
But pipelines take years to get approved and still more years until they are constructed. There’s no way a major new pipeline initiative will project will be launched with Obamao in the White House.
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