<

Why investors must watch future Energy Transfer and Targa merger

Part 5
Why investors must watch future Energy Transfer and Targa merger (Part 5 of 5)

Overview: Export business—a game changer for the potential merger

Export of NGL increasing in the U.S.

The oil and gas drilling boom in the U.S. has increased the production of natural gas liquids, as they’re often produced when natural gas and oil are produced. “Natural gas liquids” (or NGLs) is a term used to describe a suite of hydrocarbons including ethane, propane, butane, and pentane. While the supply of NGLs has increased, there have been limited opportunities in the U.S. to take advantage of the increased supply, which has caused the prices of some NGLs to be depressed. For example, propane prices fell from ~$1.60 per gallon in September, 2011, to as low ~$0.70 per gallon in June, 2012. Butane supply has increased in smaller quantities than propane, so its price has been less affected.

Export of Propane and PropyleneEnlarge Graph

The increased supply of domestic propane has caused a price disparity between U.S. propane and international propane. This is because domestic propane production has continued to grow. Despite a growing amount of propane exports, export capacity has been limited by a lack of infrastructure. However, this price disparity provides an economic incentive to build the necessary infrastructure to export propane.

ETE and ETP, through a joint venture are developing a liquefied natural gas (or LNG) export project (Trunkline LNG) at ETP’s Lake Charles, Louisiana facility. It would have a capacity to produce 15 million metric tons of LNG for export. This project could be in service by mid-2019 and with three liquefaction trains. BG Group will have exclusive rights to the export capacity. ETE has 3.1 billion cubic feet a day demand charge agreement with BG for 25 years that starts in 2019. Recently, ETE filed an application with the Federal Energy Regulatory Committee (or FERC) seeking authorizations for the proposed new liquefaction facilities and modifications to the existing terminal to facilitate the storage and subsequent export of LNG.

ETE's Export plansEnlarge Graph

Export business shows tremendous potential for NGLS

NGLS has huge investment plans for its exports business, some of which are already in place. LPG export volumes averaged 67 thousand barrels per day in 2013 compared to 32 thousand barrels per day for the previous year. Construction is underway for Phase II of the international export expansion project at the Mont Belvieu facility and the Galena Park Marine Terminal. Phase II will further expand its propane and butane international export capacity by approximately two million barrels per month. The expected completion period of these projects is 3Q14. The company expects to invest approximately $480 million in total for both the projects. Targa is also constructing a condensate splitter at the Channelview Terminal of its Petroleum Logistics business with capacity of 35,000 barrel per day. This has an estimated cost of $150 million and is expected to be completed by end of 2015.

Targa's LPG exportsEnlarge Graph

SXL also participates in natural gas liquids export boom

In May, 2013, SXL announced a joint venture with Lone Star for a Mariner South Pipeline project. The pipeline will transport export-grade propane and butane from Lone Star’s Mont Belvieu, Texas storage and fractionation complex to SXL’s marine terminal in Nederland, Texas. ETE expects to start exporting propane and butane by early 2015. The pipeline is expected to have an initial capacity of approximately 200,000 barrels per day.

What LPG exports mean for midstream MLPs

Increased LPG exports should also benefit Targa and Enterprise, who have LPG export facilities. If there continues to be a growing demand for export capacity, Targa, Enterprise, or other midstream companies may be able to identify new expansion opportunities that are accretive to unitholders.

Targa Resources Partners L.P. (NGLS) is a master limited partnership (or MLP) operating in the midstream energy space. Targa Resources Corp. (TRGP) is the general partner of NGLS. NGLS is a component of the Alerian MLP ETF (AMLP) and the Yorkville High Income Infrastructure MLP ETF (YMLI). Energy Transfer Equity L.P. (ETE), through its subsidiaries, provides diversified energy-related services. ETE is a component of First Trust North American Energy Infrastructure Fund (EMLP).

The Realist Discussions