The Permian Basin in western Texas and southwest New Mexico holds a treasure trove of oil. However, along with that crude, producers are finding the basin to be a prolific source of natural gas. In fact, according to an estimate from IHS Markit, gas output from the Permian will jump from an average of 6 billion cubic feet per day (Bcf/d) last year up to more than 14 Bcf/d by 2026. That surge in output represents a massive opportunity for pipeline companies, which are racing to be the first to build a new line out of the region.
Three have already proposed new gas pipeline projects, including Enterprise Products Partners (NYSE: EPD), Kinder Morgan (NYSE: KMI), and NAmerico Partners, which is a private equity-backed company. However, Kinder Morgan appears to be the front-runner to build the next pipeline after announcing a joint venture with leading Permian processing companies Targa Resources (NYSE: TRGP) and DCP Midstream (NYSE: DCP). As a result, it seems increasingly less likely that Enterprise Products Partners will move forward with its proposed project anytime soon.
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Restocking the backlog
Enterprise has been busily building out its pipeline of growth projects now that energy markets seem to have stabilized. The company started the year with a $5.4 billion backlog of projects, which it has since increased up to $9 billion after adding several new expansions. One of the largest recently added projects is the Shin Oak pipeline, which would move natural gas liquids (NGLs) from the Permian to its NGL hub in Mont Belvieu, Texas.
Furthermore, the company said it had more to come, including a proposed natural gas pipeline from the red-hot Permian Basin to Texas' Gulf Coast. More specifically, it would ship gas from the Waha Hub in the Permian to another hub in Agua Dulce.
Not so fast
However, that project appears to be third in line behind Kinder Morgan and NAmerico Partners. Kinder Morgan seemed to move out front when it recently signed a letter of intent with Targa Resources and DCP Midstream to form a joint venture that would construct the Gulf Coast Express, which is a 1.9 Bcf/d pipeline that would move gas from Waha to the Agua Dulce. DCP Midstream was the first to sign on to the project, which was an essential initial step given its premier footprint in the Permian. Meanwhile, the recent addition of Targa as a partner took things up another notch. That's because Targa is not only one of the largest gas processors in the basin, but it brings leading driller Pioneer Natural Resources (NYSE: PXD) with it. Pioneer is one of the fastest growing producers in the Basin and recently revealed that its output has become gassier than expected due to the makeup of its wells. That means Pioneer will produce a lot of gas in the coming years that will need market access.
In the meantime, the proposed Pecos Trail Pipeline from NAmerico would ship up to 1.85 BCF/d of gas if built. According to the company, it's already in advanced stage discussions with shippers for capacity, and given the initial conversations, it's confident it can secure enough producers to proceed with the project. This pipeline would also head in a similar direction, though its destination would be closer to the coastal petrochemical hub of Corpus Christi, which also puts it near an upcoming natural gas export facility.
Given that these projects are in later stages of development, which puts both on pace to enter service in late 2019, there doesn't appear to be room for Enterprise's proposed project right now. It seems increasingly likely therefore that Enterprise will need to table its plan for the time being.
Plenty to keep it busy for now
While another significant expansion to its backlog would have been a nice addition, Enterprise Products Partners has plenty of growth coming down the pipeline through 2019. This steady stream of projects should enable the company to continue increasing its distribution to investors as it has for the past 52 straight quarters. It also has the time to secure projects to drive growth beyond 2019, which could still include building a new gas pipeline in the Permian that starts up at a much later date. So, while it appears that Kinder Morgan will win this race, Enterprise investors have no reason to worry.
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Matthew DiLallo owns shares of Enterprise Products Partners and Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan, long January 2018 $30 calls on Kinder Morgan, and short December 2017 $19 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.