Must-know: Analysis of Plains All American's first quarter earnings

Part 7
Must-know: Analysis of Plains All American's first quarter earnings (Part 7 of 8)

Why PAA has long-term prospects in the NGL market

Increased drilling activity in unconventional resource plays have been leading to higher natural gas liquid (or NGL) supplies from gas processing plants. U.S. supply volumes are projected to increase over 30% from the 2013 levels by 2017, as estimated by many leading analysts. Many of these unconventional resource plays don’t have adequate NGL infrastructure to process the wet natural gas. These regions also lack the necessary transportation, fractionation, and storage facilities for the NGL products. It is likely that substantial incremental infrastructure will be developed throughout the NGL value chain over the next several years. Recently, North American gas and NGL prices have traded lower than worldwide crude oil prices. This trend is expected to continue in the future, which means North American NGL will be internationally competitive, either as North American manufacturing feedstock, particularly the domestic petrochemical sector. Some part of the production will go to the overseas markets as exports. In addition, growing production of Canadian heavy crude oil is likely to create demand for additional diluents, primarily natural gasoline and butane.

NGL SalesEnlarge Graph

PAA has actively worked to broaden its infrastructure in the North American oil resource plays and in the Canadian NGL-rich areas. PAA’s Fort Saskatchewan facility at Edmonton, Alberta is a key North American NGL hub. The facility receives, stores, fractionates, and delivers NGL products. It is connected to other major NGL plants and pipeline systems. During 2013, PAA began upgrading the Fort Saskatchewan storage capacity. The first phase of the project will add two additional NGL storage caverns and approximately 2.5 million barrels of capacity. For NGL fractionation in the Sarnia facility, PAA initiated a brine disposal program, which is expected to increase useable NGL storage capacity by three million barrels. In 2014, the company plans to initiate a brine disposal program at its Windsor storage terminal that will increase capacity by one million barrels.

In 2013, PAA announced the construction of a new NGL fractionator in the Eagle Ford area of south Texas. The facility will have a fractionation capacity of up to 15,000 barrels per day of NGL Y-grade product. PAA already has its natural gas gathering asset base in Gardendale (La Salle County), Texas. The new facility will also source from throughout the Eagle Ford producing region. This project is supported by long-term third-party commitments and is expected to be in service in 2Q15.

Commenting on the company’s NGL business, Harry N. Pefanis, the Chief Operating Officer (or COO) of PAA, said in the conference call of 1Q14, “we have a large part of the value chain not only across the U.S., but in the Canada, as you mentioned. So, what we did want to comment on, I think, we basically said very strong performance in crude oil and NGL really throughout all three segments, so across the board offset by some of the challenges of the weather associated not only with natural gas, but also with crude oil. And so, I think the benefit of what happens is—no matter what happens, where the disruptions are anywhere in the U.S. and Canada, PAA is generally well positioned toward a minimum benefit to some extent.”

Plains All American Pipeline (PAA) is a master limited partnership operating in the midstream energy space. The general partner of PAA is owned by Plains GP Holdings L.P. (PAGP). PAA is a component of the Alerian MLP ETF (AMLP), the Global X MLP ETF (MLPA), and the Global X MLP & Energy Infrastructure ETF (MLPX).

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