To say that energy production is booming in the United States would be a bit of an understatement. The country is on pace to increase production of crude oil and condensate 60% from 2018 to 2025, while production of natural gas and natural gas liquids (NGLs) could grow 39% and 69%, respectively. The country could export as much as 7 million barrels per day (bpd) of crude oil by 2025. For context, Saudi Arabia's crude exports are just shy of 10 million bpd today and it is the world's largest exporter.
The overnight surge in output will require a significant investment in infrastructure that allows producers to move product from field to processing plant, and then on to a power plant, chemical manufacturing facility, or export terminal. Enterprise Products Partners (NYSE: EPD) has been leveraging its massive size to answer the call -- and the strategy led to a record year of operations in 2018. But management has even bigger plans for the road ahead. Here are three things for investors to watch in 2019.
1. Staying the course on its self-funding strategy
Years ago, Enterprise Products Partners decided to pare back distribution increases so it could devote more of its cash flow to growth investments. While the decision was uncommon among master limited partnerships (MLPs) that typically pay out close to all of their cash flow, most investors probably haven't even noticed. The business has increased its distribution for 20 consecutive years -- and its units pay a healthy 6.1% yield.
More important, the business generates 1.6 times more cash flow than it needs to cover its distribution. The company has been diverting that "extra" cash to self-fund capital investments -- the kinds of projects that other MLPs might fund through debt and equity offerings. The strategy results in lower distribution growth in the present, but less leverage creates the upside of higher profit growth when assets come into operation, and offers protection against market down cycles. It's worked beautifully so far.
Enterprise Products Partners self-funded $4.2 billion in capital investments in 2018. Ramping up production from new assets fed a 31% year-over-year increase in operating cash flow to a record $6.1 billion, while free cash flow from operations soared 50% year over year to $2 billion. The business entered this year with $6.3 billion in liquidity and a debt-to-adjusted-EBITDA ratio of 3.5, its lowest level since 2013. This combination provides a lot of financial flexibility. Investors will want to watch that the strategy continues to deliver results and that management doesn't get sloppy after record success last year.
2. Debottlenecking the Permian Basin
When it comes to the pace of the American energy revolution, the Permian Basin giveth, and the Permian Basin taketh away. The world's most important source of oil and gas production growth is perpetually hampered by infrastructure constraints. Enterprise Products Partners is doing its part to relieve the bottleneck so the region can live up to its full potential. The business has invested over $6 billion in the Permian Basin to date, primarily in infrastructure focused on NGLs (53% of companywide gross margin in 2018) and crude oil (21%). More capital is on the way.
Enterprise Products Partners expects to bring on line and expand four natural gas processing plants, multiple fractionators (equipment that separates natural gas into its main components), and a dedicated NGL pipeline in the region by early 2020. That will increase the company's total Permian Basin operations to 1.6 billion cubic feet of day of natural gas processing, 1 million bpd of NGL fractionation, and 550,000 bpd of NGL pipeline capacity.
Bringing the projects into operation in time will have major (perhaps global) implications. That's because most natural gas produced in the Permian Basin is pulled up with crude oil, but a lack of natural gas infrastructure forces producers to flare it on site. Allowing producers to monetize the "byproduct" of natural gas and NGLs will make production even more economical -- creating a win-win for the business and customers.
3. The pace of U.S. ethylene facility start-ups
While crude oil and natural gas get all the headlines when it comes to America's shale revolution, investors shouldn't ignore NGLs. There's a reason the forgotten petroleum products comprise over half of Enterprise Products Partners' gross margin. In case that's not convincing enough, consider that over $200 billion is being invested to build world-class petrochemical facilities in the United States thanks to the world's cheapest and steadiest supply of NGLs.
The biggest opportunity might be in ethane, an NGL that is coveted for its ability to be converted (or "cracked") into ethylene, a petrochemical used to manufacture materials for applications ranging from food packaging to making airplanes lighter. All of the world-class ethylene facilities in the United States today consume about 310,000 bpd of ethane. By the end of 2019, that will swell to 605,000 bpd of ethane after five ethane crackers become operational on the Gulf Coast. Yet another 300,000 bpd of ethane will be required to supply ethylene plants started up in the early 2020s.
Enterprise Products Partners is well-positioned to exploit the opportunity. It will soon wield dedicated NGL pipelines promised to be chock-full of cheap product from the nearby Permian Basin. It's also thinking downstream by developing a world-class ethylene storage and export network comprising 10 fractionators, 600 million pounds of underground storage capacity (within a half-mile of eight different pipelines), and a dedicated petrochemical pipeline linking to its Gulf Coast export terminal capable of exporting up to 2.2 billion pounds of ethylene per year -- roughly 10% of the country's expected production from world-class facilities at the end of 2019.
Investors will want to watch that the company's ethylene network and regional ethane crackers start up as expected.
Is this the most important energy company you haven't heard of?
Enterprise Products Partners may not be a household name, but it's playing a crucial role in America's energy revolution. The business is leveraging its heft to pour money into expansion projects, which subdues distribution growth today for a better return tomorrow. Operating results from 2018 prove the self-fund strategy is working. Meanwhile, those expansion projects are creating lucrative opportunities on their own. The company's leadership position in relieving infrastructure constraints in the Permian Basin and in supporting the country's NGL value chain promises to create value for investors with a long-term mindset. Simply put, this may be the best oil and gas stock you've never heard of.
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