Enterprise Products Partners L.P. (EPD) Earnings Call Transcript & Summary

What was the last part of the question, Christine?

And why it's difficult for a newcomer to break into Mont Belvieu?

Okay. Mont Belvieu is the heart of our NGL system. And it's kind of the church house, if you would. That storage is worth its weight in gold. I also said on that earnings call. I got to be careful what I say on earnings calls that you're listening to, Christine. But it is the church house. Now it doesn't say we won't give somebody an interest in a fractionator, which we've done, but we won't give them any say so. So it will be so passive. I've got -- we have 1 CEO that wanted a piece of the pipeline. And I said, you're going to be passive and he said, "I can't be any more passive than I am on that fractionator I've got with you guys." That's the church house. And we will joint venture pipelines that feed that church house like we did on Shin Oak or like we did on Texas Express and Front Range. But that's storage made a big difference with us in the second quarter when prices fell apart. That storage we converted an NGL to diesel. We had converted another one to motor gasoline. We had a lot of crude oil tank storage. When everything fell apart, one of those opportunities that came out of that chaos was storage, and we're blessed to have that storage in Mont Belvieu. Can you imagine if we had a joint venture partner in that? I mean we want it all. So we'll do some things around Mont Belvieu, but you're not going to have a bulk. We'll do some things on the pipeline that these -- you'll probably have a bulk.

And roughly right now, I think the NGL business makes about 50% of your business and crude about 1/4 and then the remainder is split between petchem and your nat gas segments. The breakdown for the capital project backlog is roughly similar, except petchem and NGLs are slightly switched. Petchem makes up a little less than half and NGL is about 15%. So how do you envision the pie for cash flow to change as a result of this shift in spend several years out from now, especially because I think in your slides, I see goals for the petchem segment to almost double for gross operating margin by 2024?

We like primary petrochemicals, and I'm talking ethylene and propylene and isobutylene. I don't see -- to me, it's an extension of our value chain, and we can leverage all the way back to the Permian on the basis of what we're doing in Mont Belvieu. We've done that. It just extends the value chain, and we can compete more effectively. In terms of petrochemicals, our PDH 2 is probably a big part of that. What some people aren't fully aware of is on propylene and ethylene, we're creating a market hub that people can freely trade in, that people could nominate on our pipelines and get to whatever destination they choose to, that people can export both propylene and ethylene. So we like the idea of taking this midstream model and putting midstream on primary petrochemicals. A follow-up question would probably be some about Canada. People up there building a PDH and polypropylene. Yes. You're not going to see us competing in polypropylene with our customers like Lyondell. But we've been in this business since 1978. It's not new to us. It's just that we are putting a focus on trying to build a midstream model around primary petrochemicals. Does that make sense, Randy?

Yes. Christine, looking a little bit at the numbers, I want to say we're that segment, that Petrochemical Services segment and Refined Product Services segment where that's currently like 12%, 13% of our gross operating margin, we think the whole pie is going to get larger. And -- but even the -- with the capital that we're putting in the ground, maybe that segment grows to mid- to high teens is more giving you some context.

I think that segment, it answers what we're doing in field. So you see what I'm saying, Randy?

Yes, yes.

And so I don't see it as, "Oh, you're investing more in petrochemicals than your NGLs." I see it as we're investing in our value chain. And I think one -- I think the petrochemical supports what we're doing in NGLs.

Okay. It sounds like you just look at everything on a more holistic level rather than kind of segmenting it.

I don't know how everybody else does, I did.

Moving over to crude exports. And Randy, I think you touched upon this on an earlier question. But on the last quarter call, you also mentioned that you had seen a pickup in crude oil exports, which I think most of us were surprised about just given what the world was looking like in 2Q but particularly in demand for the lighter fleet. So can you just talk about the trends you've seen since then, the outlook for the exports in the medium term, especially given the marginal barrel has needed to clear via exports in the last couple of years? So if the marginal bound has fallen off with the outlook, production outlook being revised lower, how much of export has to fall to keep the U.S. market balanced?

Yes. I think July was a heck of a month, Christine, for crude oil exports. We have seen a little fall off on crude exports. What we have seen is a higher appetite for the light crude and for the condensate. Interestingly, though, our LPG exports haven't fallen off at all. We're effectively full on our LPG exports month in and month out through this whole thing. So yes, we've seen a little fall off in crude. We've seen a higher appetite for the lighter crudes. I guess that's because they don't want distilled cut. But conversely, our LPG exports haven't been any stronger than they are now. We're full.

And do you anticipate the LPG exports to maybe fall off a little when maybe the stay-at-home orders in Asia are lifted a little more? Because -- is that what is driving the strength in those LPG exports right now with everyone staying home?

Yes. I think a lot of what's driving this trend is you had a lot of demand growth. That's sticky as Tony Chovanec would say. I mean LPG exports to China are 60% higher over the last couple of years when they banned coal stoves and went to LPG. We're seeing a lot of sticky demand growth over the last couple of years out of India. So personally, I think the world wants our LPG, and I think -- I don't see it any fall off in it.

Maybe if we can move over to capital allocation. Underlying macro backdrop over the 15 -- over the last 15 years has been that of robust growth. And as a result, sizable capital programs. Now that the industry appears to have entered a more mature phase, would love to just get an update on how you're thinking about capital allocation. I saw that you reduced CapEx by a further $800 million with the cancellation of Midland-to-ECHO 4 but how should we think about the incremental free cash flow generation that you'll generate as a result of that? And how are you thinking about further debt reduction, stock buybacks, dividends, et cetera.

Okay. Christine, I think the first thing is we're...

See this is how you work as co-CEO.

That's right. And Jim, chime in. I think the first thing is that we want to tell our customers, whether the customers on the supply side or the demand side is we're open for business, and we're a midstream energy company provider. So there are some projects out there that makes sense for us and our customers. We'll come in and take a look at them and see what we can come in to make sense for both of us. So we're still open for business. Given that, given where we are, just with this whole energy price cycle or really crude oil price cycle that was thrust upon us by this coronavirus and a demand collapse, really, on both sides, you're seeing demand come back. Depending on the industry, some of that demand is going to snap back much quicker. And then with producers coming in and rationalizing how they're going to spend capital, we are in a period where we're going to have lower growth CapEx needs. So that does free us up from a standpoint and just like coming in and rationalizing this project on Midland-to-ECHO 4 that was a good win-win for our customers and for us to better allocate capital in the near term. And so I think it will come in and accelerate us to get to what would you call it free cash flow after distributions are paid. And with that, we'll have the flexibility to come in and reduce debt with that or return capital back to our investors, and that would include through buybacks.

We may be in a mature sector, as you call it, Christine, but we're not a mature company. We've got a long way to go. And we're not through growing. It maybe we grow a little differently. One of the things our people are looking at is, how do you -- we've done a lot on repurposing pipelines. I think there's more we can do. So we can do a heck of a lot more of what we got. But I don't think our CapEx is going to 0.

Speaking about different ways of growing. Would love to get your updated view on M&A. Your purchase of Oiltanking a number of years ago was timely and has contributed to EPD helping the export footprint that it does. And several years ago, it looked like you were interested in gas assets. So as you think about the next decade or 2, is this an area that you'd be interested in expanding into as the growth outlook for global gas looks maybe a little brighter than that of crude demand? Or do you want to participate or do you find that participating it through your wet gas exposure is good enough?

Yes. Christine, I'll lead off and let Jim chime in. The -- a couple of things. This goes back to an earlier question with regulatory on getting pipelines built. And when you look across the country, where a lot of those obstacles have been are all natural gas pipes and go bigger because that's the cleanest of the hydrocarbons out there. So a little bit of surprising on that front, but there are some obstacles in coming in and building out a natural gas grid in the U.S. When you get into the LNG standpoint, there's definitely an incumbent advantage there. The guys that built LNG import capability, that didn't work so well, but they had the pole position and to pivot into LNG exports. So those guys are really in a better place. And in the near term, it looks like we may be in a position, at least for probably 3 or 4 years, the world may be in a position of overcapacity on that front. So you may have a little bit of a lid there before the world catches up from a demand standpoint and need more LNG export capacity. Our wheelhouse and how we grew up was more on the natural gas liquid front. So I think coming in and participating on the rich natural gas side is probably more in our niche.

And we've been pretty successful in building out a crude oil system. We use the same business model as we do on our NGL business. We've done the same thing with refined products, where the people haven't -- don't have an appreciation. We do quite a bit in refined products. And we're doing the same thing in petrochemicals. I don't see us doing natural gas. You ask about M&A. I just don't see the opportunity yet. I think we're not going to pay premiums or forward EBITDAs that nobody believes in. So I don't really see it. But we did grow, and you mentioned Oiltanking, which I think you called it transformative or something. The most strategic acquisition Enterprise has ever made was the Diamond-Koch acquisition because it gave us the salt dome storage wells that we needed. If we hadn't involved that, we wouldn't have all those towers out there, and we wouldn't be exporting the volume that we're exporting. So you never say no to acquisitions, but they have to be something that fits into your arm and answers where you're going.

Maybe to wrap up this fireside chat. And I know it's early but I kind of have to ask it to see how you guys are thinking about the upcoming election. On my end, conversations with clients have gone beyond the potential change in President, but now also incorporate the potential Democrat control over Congress. Completely recognizing that any change will take from time to implement. But what would you say would be the one change that would be very negative for the sector and/or for enterprise?

Well, Christine, I come back and we had 8 years with a Democrat President, and I want to get -- I guess, 2 years where they controlled -- where the Democrats controlled the House Senate and the White House. And I think from that standpoint, the industry fared well. I know there were conversations back during the 2 Obama administration trends when it comes to MLPs, it was actually expanding qualified businesses that could go into am MLP to include renewables. And currently, there's a democratic senator, Senator Coons out of Delaware that has a legislation to come in and do that right now. So from an MLP standpoint, I think we fared fairly well during that democrat administration. So we'll need to see what happens in the forefront. And when we come in and you look at the -- especially the products that we handle on the natural gas liquids side, on the natural gas side and the crude side, even as the world transitions, we think it's going to be a transition to all of the above. And I think we've got some slides in our slide deck, a lot of it from EIA and IEA, that the demand for natural gas, natural gas liquids and crude oil is going to be sizable and is going to be larger in 2050 than what it is today. And a lot of it, especially what we touch on the NGL side and feeding in the petrochemical side, it's products that we deal with every day in our everyday lives, whether it's plastic that you use for building materials or whether it's coming in an artificial rubber for the tires and even a tire, even electric vehicles need tires. So we still see that demand pull coming from forward natural gas, natural gas liquids and crude.

There's a lot of plastic in those hair dryers in San Francisco in those lines.

Well, Randy and Jim, I'd like to thank you so much for your time and sharing your insights today. And I'd like to thank everyone in the audience for tuning in. I hope everyone has a great rest of the week, and I hope to see you in person soon, but also in person for our conference next year.

Thank you, Christine.

Thank you, Christine.