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

Well, good afternoon, everyone. My name is P.J. Juvekar. I head up the Chemicals group here at Citi. And our next company today is Enterprise Products. Many of you know Enterprise Products. It supplies NGLs, ethane and propane to many of our companies. The company is also a growing chemicals business. The company is officially covered at Citi by Timm Schneider, our MLP analyst, who join by phone here. So Timm, welcome. And do you want to introduce Enterprise and the speakers and then take it from here?

Sure. Absolutely. Thank you, P.J., for that. And I'm going to keep it really informal, real brief on the intros. Most of you already know Jim Teague, Co-CEO of Enterprise, who's joined today by Chris D'Anna, SVP of Petrochemicals. And it's actually interesting, guys, both of you have kind of cut your teeth in the chemicals business at Dow Chemical. So this is nothing new to you. It's a little bit new for some of the midstream investors maybe. Obviously, you guys are the only company out of my coverage that is at this conference today. Look, the midstream push into petrochemicals certainly is something that we've talked about here at Citi specifically since late 2019. We call this the midstream shake weight. I'm not going to get into the details of that, but it certainly has been one of our key themes. So super excited for you guys to join us today. And with that, look, we already have a ton of questions for you, but maybe I'll pass it over to you, Jim and Chris, for some opening remarks, then we can get going.

Yes. You're right, Timm. We are a midstream energy company but growing our position in [indiscernible] petrochemicals. We have 50,000 miles of pipelines that's in NGL, crude oil, natural gas, petrochemicals and refined products. In that 50,000 miles of pipeline, we move over 10 million barrels a day of crude oil equivalent. We have 250 million barrels or 260 million of storage for our NGLs, petrochemicals, refined products and crude oil. We have 21 natural gas processing plants, 25 fractionators, a PDH facility and iBDH facility. We're building the second PDH plant. We have 19 deepwater docks that can export natural gas liquids, PGP, ethylene, crude oil and refined products. So we have what we like to call a value chain. Many people think we are entering the petrochemical business. The reality is we've been producing propylene since 1978. And once we get our new PDH facility online, I think we'll make over $1 billion in our petrochemical segment. So more and more, we are taking our value chain further downstream in primary petrochemicals, and we like it.

Got it. Thanks for the quick intro.

And maybe if I can ask the first question on this, just kind of your last comment here. Jim, as you guys kind of discussed this at the Board level, why the focus shift downstream? I don't necessarily want to say versus upstream. Maybe it is versus upstream, but can you maybe run us through why you guys specifically, Enterprise, are better positioned than many of your peers? I can only really think of a handful -- not even a handful of folks that can probably compete with you guys on the petchem side.

Well, we've been doing propylene for a long time, and we've built this system up to -- the propylene system [indiscernible] maybe Chris can chime in. We built the propylene system out to where we have a lot of connectivity within storage. We have the capability to export it. We see it as a natural extension of a value chain that goes all the way back to the producing basins. If you think about -- when I was at Dow, one of the most important things was what's our feedstock position? Well, our feedstock position for our PDH and our iBDH, I think, is probably the best on the planet. You heard me say we have over 10 million barrels a day of crude oil equivalent, a heck of a lot of that is propane that feeds that -- those PDH products or butane that feeds the iBDH plant. So it's not new. It's just that we're very fortunate. We've been in, in a while, and it's something that we can build on without a heck of a lot of capital.

Yes. Just adding on to that. Over the last 40 years, the system that we've built were, on propylene, were connected to 85% of the production and consumption in the U.S. So the value of the business is this value chain that is a value chain within the value chain, and that our propylene system has many different components that we can leverage just like we leverage the greater value chain within Enterprise.

Got it. And Jim, maybe I can follow up on the comment you made on growth CapEx. What are you guys envisioning kind of spending in that business over the next couple of years? And how should investors, both midstream and chemicals, I guess, kind of think about the returns that are embedded in that business? And then I have a follow-up on that after that.

[indiscernible] The projects we have under construction right now is in the neighborhood of $4 billion, and I think to purchase that is in our petrochemical segment. And granted a lot of that is -- a part of that -- a big part of that is PDH 2, I think -- probably, if you're sitting here with investment-grade companies doing tolling deals along -- on the asset itself, I think you're probably looking at, what, 12%, 15%, Chris?

That's right.

But there's upside to that because inherent in that system is the ability to market around it. And whenever you look at what we're trying to accomplish and what we are in propylene and more and more in ethylene is -- we're building the system where we've got connectivity. Our objective is to have connectivity on both ethylene and propylene from the Mississippi River to Corpus Christi. And it's a lot like what we've done on our NGL system, and then anybody who wants to tie into that system to either put stuff in or take stuff out or store it or export it, then they can do that. The other thing that we're interested in is we'd love to see the index price mean something. So -- because if you have an open system, an index price and you lay a financial component on it, I think it gives people within the industry the ability to do -- to move their product and take it to their facilities, to hedge it, to do whatever they want to with it.

I think just to touch on, Jim, what you said in the opening, that all we're really doing is taking our midstream model, this model that we've been successful deploying upstream and using it downstream. And we think there's tremendous opportunity within that.

Got it. So a follow-up question that I have for you is a lot of times, when I have this discussion with midstream investors, they kind of push back, and they say, well, look, Timm, petrochemicals, it's a margin business. I don't really understand it. Can you kind of run us through how, in fact, that's not really the case for you guys? And maybe talk us through the contract structure as you're doing this downstream push.

Well, on our PDH plants, the contract structure is pretty much a lockdown tolling arrangement. [indiscernible] Chris, why don't you go for it?

Yes. We have 2 different structures, but they've been essentially following this whole midstream model. So we have one for PDH specifically where our customers provide propane and we toll it into propylene and give them back the propylene. The other structure, very similar, except that we're selling on a propane plus basis. In both cases, we're locking in our returns but also allowing our customers to participate in a world-scale PDH project for less than world scale.

What about your isobutylene or what about your ethylene export? How are those contracts structured, Chris?

Yes. Those are on a cost-plus type arrangement as well. And typically, what we do is we look for -- we'd like to sell out assets, but those assets sold out may mean that's close to nameplate. And generally, we see 10%, maybe 20% above nameplate that gives us some other upside.

And your ethylene dock?

Yes. Our ethylene dock were 95% sold out, but that's on a similar basis to how we contract our LPG dock, which is we're not selling the ethylene. We're just providing a service for our customers who will either produce it and source it themselves or will [ buy ] it [indiscernible]. And so in either case, we're creating value in our entire system through our pipeline, through our hub and through our export terminal.

Timm, I'm at the risk of moderating for you. What about your [indiscernible] splitters with this?

In our splitter business, we have a similar structure in that we buy refinery-grade propylene, but in some cases, we buy that refinery-grade propylene on the basis that we sell. So we look to lock in margins wherever we can. We -- our petrochemical business is different than most of the petrochemical businesses that you cover in that we don't have this commodity exposure like most of them. We're exposed to the growth of the petrochemical business but not so much to the commodity price in [indiscernible]. And on our splitter business, all of our businesses within petrochemical will have some integration within Enterprise. Our PDH -- we have the best feedstock position of anybody on the planet to be able to supply PDHs. But our PDH also produces butylenes that we feed in our C-Corp business. The same thing on our iBDH. We produce propylene off that on iBDH that goes back to our splitters. So even with that, all the moving parts within our petrochemical business, there's a lot of integration there.

Got it. P.J., I'm going to pass it over to you, see if you have any questions for these guys.

Yes. A couple of quick questions. You talked about your ethylene exports. Where do your ethylene exports go today? What are the key customers in your ethylene export business?

We See most of our ethylene moving either to Asia or Europe. And today, we see most of it going to Asia. The start-up of our dock was mostly the [ Handesty ] ships. We've had a couple of really large ships that we've loaded. We've also had some, as we announced earlier this year, some ships that had both ethane and ethylene on them because our Morgan's Point facility where we have our ethylene exports is also where we load ethane. We've also done similar type operations on our propylene dock as our LPG and our propylene are exported from the same facility. So by able -- by being able to load olefins on to NGL ships that are generally larger, we're able to take advantage -- our customers are able to take advantage of pretty significant freight savings.

Great. The next question I have is on your ethane outlook. With most of the ethylene crackers that were coming on in U.S. are online now, so what's your outlook for ethane? And my specific question is that oil production is likely to drop next year because of lower rig count. And does that mean that associated NGL production could also drop? And can you just discuss that?

Yes. I don't think you can deny that you're going to see a decline. I think the question is, when do you see a price signal? Now, in terms of ethane, P.J., I'm not worried about ethane at all because there's plenty of ethane, right? I look at our storage well, I know there's plenty of ethane. But in terms of a decline, yes. We've been very vocal. We believe that there's a -- because of everything going out, we believe there's a price signal as early as the second half of next year. That doesn't mean that production cranks up overnight, and it doesn't mean that it stays there, but it's -- we believe price will get to the point that you'll see people back out there putting rigs out in the field. We do believe that some of this consolidation, like Concho and Conoco, like WTX and Devon, like -- who was it? Chevron and Noble. Look, that's going to -- that's healthy in the long run. It will rationalize production to some extent, but you're going to -- these are the same people that we have contracts for. We went after the majors and the major independents. So we feel pretty good about where our position is. We think this production comes back over time. We don't think, for example, the Permian is a resource base that can be denied. And we're not worried about -- I keep getting people asking, what are you worried about? Ethane tightness? No, not at all. Are you worried about propane tightness? Not at all. And we believe that every incremental barrel is either going into an existing petrochemical plant and beyond that, exported. We still think there's a lot of ethane being rejected right now. Does that answer your question, P.J.?

Yes. Yes. No, that's a good answer. I guess, my follow-up question is twofold. One, you talked about the price signal in ethane that would incentivize drilling. What is that price signal? Or what's that price level? And then I have a second question, follow-up question on that.

Well, I think what I said was the price signal in crude oil.

Crude oil, okay.

Yes. I personally think these producers are going to be a little more disciplined. I talked to one of them that said, you know what, $50, we're not going to jump out there and start drilling. We want to see this thing get a little healthier. But I think the price signal personally that we're going to get are going to -- could be something that would surprise me. Tony Chovanec and I argue about this all the time, by the way. But it's not going to surprise me to see this thing come back to $60, $65, and I think that creates activity. But what drives that? I think the -- P.J., you know [ Peter ] [indiscernible], I think. Peter had a slide that kind of woke me up a little bit. And the slide said that the catalyst for the roaring 20s. Now I'm sure -- I want to make sure people understand I was not alive in the roaring 20s. But the catalyst for the roaring 20s is coming out of the Spanish [indiscernible]. I think there's so much pent-up demand. I've got a houseful of people that -- they're chomping at the bits to get on an airplane and go somewhere. So I was with the Governor of Texas along with other people yesterday for lunch, and he talked about the distribution system they have for vaccines. And it was pretty impressive. And he thinks that by the end of the first quarter, April is the latest, you're going to be moving back to normal because so many people will have been vaccined. And incidentally, I'm in front of the queue given my age. So yours comes after me, P.J. But we're pretty bullish. I'm looking at Chovanec over here. We're pretty bullish at what we expect as early as the second half of next year. And I don't think we're alone in that. And I think demand drives a lot of -- the price on what you're going to get in crude. And if you get a price signal in crude, then you get the associated gas and everything else. I hope that helps.

No, that does help. Now people talk about -- when I talk to the cracker operators, they talk about having a lot of ethane and a lot of ethane rejection in the U.S., but that rejection may not be where crackers are. And so do you think at some point that PADD III, where the crackers are, will have to bring in ethane from PADD II or PADD IV, and that could drive the price of ethane?

Well, yes, but you still are competitive. Do I believe that? I believe that's very possible. So -- but come on, so the price of ethane goes up a little bit, but what's the gas crude ratio? I think you can have -- personally, I think you can have both. You can have advantage [ separately ] in plants, and that price of ethane went up because you happen to bring it out of the Rockies or the Midwest or wherever, but you're still better off than anywhere else in the world given what we think the gas crude ratio [indiscernible]. I mean, we're not building this ethylene logistics system. We're building it because we believe in the U.S. ethylene industry. We believe in their cost advantage. And so yes, I think you will, but I don't think it's a big deal because I think there's still advantage, big time.

Right. And my next question again from chemical side is you have a slew of crackers starting up in China. Some of them are based on imported feedstocks. So what is your outlook for Chinese imports of U.S. molecules, particularly propane and then ethane?

I think China's propane demand is up 4%, 5% year-over-year, while the demand for things like refined products are down. I think in terms of propane, I don't think it's an appetite of the crackers. I think it's the fact that places like China and India have converted hundreds of millions of homes from burning coal or animal waste or wood to LPG, and that's sticky demand. And I think more and more, that's becoming the demand. In terms -- I tell you, we used to talk to Chinese companies that were looking at building ethane crackers on imported ethane. And I'll be honest with you, I wouldn't make that bet, but -- and I -- they're not talking to us anymore. So obviously, they're not making the bet. Have you got anything on that, Chris?

On ethane exports or ethylene?

Both.

Yes. I think we're going to continue to see the incremental ethylene molecules load across our dock. We talked about 95% sold out for a number of years. We do expect that we'll have some incremental capacity to be able to export beyond that. But that ethylene that's leading the U.S. is going to satisfy a dislocation in the market in Asia for the most part, maybe some in Europe. So we do expect that demand to be strong.

One of the things Chris said earlier that I think is worth mentioning though, is we have co-loaded ethane and ethylene on the larger ships. So what that does to that ethylene break component is huge. We've done the same thing with propane and propylene. So we're going to get creative and figure out ways to do this at a cost -- at a lower cost or more -- and be more efficient.

I've got 2 more questions, and then I'll turn back to Timm. First one is, would you get into the cracker business? Because then you'll be competing with some of your competitors. But is that something that is, you know, you are in the propane to propylene business, so why not ethane to ethylene?

When I was at Dow, at one time at a conference, I made a statement that as this -- as the shareholder revolution has happened [ is ] not true. I said, if you can't afford feedstock flexibility, you probably can't afford to be in this business. So I guess that sounded arrogant. The reality is when you had a flexi-cracker back in those days, that flexi-cracker brought a lot of value downstream for your polyethylene because you could change feedstocks and produce lowest cost. I think today, an ethylene cracker is a utility. I'm not -- I think the value lies downstream. So I don't think we would be competing -- I mean, you could have said the same thing about a PDH, but a PDH is nothing but a utility. An ethane cracker is nothing but a utility. So some of your ethylene companies on this call want to talk to us about tolling ethane to ethylene, then we would be -- coming from Dow Chemical is kind of a dream situation, P.J., but I don't see any reason. I don't see it as competing at all.

Okay. That's good. And my last question is there has been some talk about oil companies want to get into chemicals because oil companies see electric vehicles coming. Over time, their gasoline demand could be going down, and maybe refined product demand goes down. The jet fuel are [ up ]. So maybe they want to get into chemicals because that's a growth part of the business. I mean, what's your view on the big oil getting into chemical businesses? Do you have a view on that?

Sure. I was with Mr. [indiscernible], one time before the COVID thing, and he said to me that big [ refinery ] they have, that is just fascinating. He said, "Jim, that refinery is going to evolve into a chemical complex." So they call it crude-to-chemicals. I see that as an opportunity for aircrafts. I don't see that as something that we should be afraid of. I see with our petrochemical footprint, and our -- and the way we operate -- why can't we partner with some of these refiners and be their chemical outlet? We -- this should be a natural for us if that's the way they want to move. Chris, did I s**** you up on some of the projects you're working on?

No, no. And I think absolutely. So if you look at these big crude-to-chemicals refinery complexes that are being built globally, these are all new. In the U.S., you have a lot of refineries that don't have that integration. And so, yes, just like Jim said, we're really the maximum fit to be able to take part of the chemical industry.

Why can't we be their petrochemical integration is what we're saying, P.J.

Right. You're in a good position to do that. So that's a very, very interesting viewpoint. It's something that chemical investors don't think about, so I'm glad really you came on to the chemical conference given your growing chemical business. That's very interesting. So Timm, back to you, and if you want to ask questions on other parts of Enterprise.

Yes. Sure. And then P.J., I'm not as Zoom-savvy as you are, so I wasn't able to log on. But is there any questions that trickle then from the audience on the webcast? I just want to make sure we get to everybody. If not, I can keep going.

Keep going. I'll find if you have any questions.

Okay. Sure. So Jim and Chris, I kind of want to ask a question around M&A. Do you guys see yourselves at EPD making any sort of maybe larger acquisitions, if you think the value accretion is there, obviously, on the chemical side? And if so, any assets that you might be interested in? Look, a lot of these chemical companies still own a lot of pipeline infrastructure and whatnot. Is that something that you'd be open to taking a look at?

If you -- we're building out an ethylene pipeline network. And yes, I could see -- yes, it goes back to -- I'll give you an example. We bought gathering systems from producers. Because if I'm a producer and I've got a gathering system, there's no way that producer next door is going to come on my gathering system because he knows who has first priority. But what we were able to do is acquire those gathering systems and then bring third-party [indiscernible] to make them even more valuable. I don't see why the same thing couldn't be true if some petrochemical company had ethylene pipelines or propylene pipelines that we could do it. I would love to look at something like that and extend our network, and they get a good value for it. Chris?

Yes. Absolutely. I think if you look at the value of a pipeline or storage or any of those type of infrastructure assets for a chemical company, it's really just security of supply. But that's something that we're really good at. And where the opportunity exists, yes, I think we love to talk about those type of acquisitions.

Got it. But it would be fair to say that whatever you guys would look at, it has to have some sort of a longer-term kind of take-or-pay or fee-based arrangement? So this wouldn't necessarily be spread exposed assets or anything like that. So it's almost like you have a guaranteed rate of return or so with a pretty good creditworthy counterparty.

The beauty of the petrochemical business, Timm, is -- I mean, you have your ups and downs, appreciate that, but you don't have a decline, right? You're in a business that's growing beyond GDP. So there's other ways to structure these things, I think, that would give us comfort. It might be a requirements contract rather than a take-or-pay contract. So as they grow, you grow with them.

Absolutely.

So what I'm telling you is don't scare away these guys with take-or-pay requirements, might work too.

Got it. Got it. That makes sense. And I appreciate, by the way, all the color in the slide deck you guys put out today. It's where you guys could kind of run us through the margin opportunity in the chemicals business over the next couple of years. Obviously, a big portion of that is going to be the PDH unit. Can you maybe run us through what some other moving pieces in that margin buildup are and what some of the upside opportunity -- what could move the bookends on that?

I think we've understated this marketing hub for ethylene and propylene and our export outlook. I think we've understated those. I think when you look at our iBDH and our MTBE businesses, I think right now, they're under pressure because of low refinery runs, but that's -- that -- I think that has tremendous upside as things normalize over the next 6 to 9 months. So those are the primary things, I think. Chris, do you have...

I think that is huge. But on top of that, all of our new assets are going to have some excess capacity above nameplate. So that's another area where I think we'll see some incremental margin.

Got it.

Timm, there is one question here on...

Go for it.

The question is regarding refinery margins being low, minor 2-1-1 margins. Does that have any impact on your NGL business?

Well, to the extent that refineries are running at, what, 75% to 78%, P.J., that means we're getting less LPG from those refineries. And I guess it means we might be delivering less isobutane to those refineries, and it might mean that we're getting less refinery-grade propylene. That was the case right after everything shutdown. I mean, we couldn't buy a barrel of refinery-grade propylene. But those -- that's come back pretty good. I guess we're up around 78%. I think -- I really believe -- and that's an upside, frankly, as these refinery runs increased driven by demand growth as we come out of this pandemic, I think that's upside for us.

And Jim, what kind of return on capital do you target when you get into chemical businesses like the PDH business or you may want to call it ethylene export? What kind of return on capital do you target? What is your hurdle rate?

It kind of depends. If you have an asset that has got -- that's underwritten with take-or-pay contracts, then you essentially have an annuity with upside on the -- our engineers. Like if we tell them we want a 1.5 billion pound a year plant, I guarantee you the [indiscernible] will want [ 6 5 ]. It's just the way it is. We have upside on the -- which you can produce beyond nameplate. So if I have something like that, I can get an 11%, 12% return on the underlying asset with upside on top of that. That's one thing. Now if I've got a acreage dedication or something like that, then on whatever it is that we expect to get because of the volume risk, then we're going to want a higher return. We're looking at, what, 15% that we like. But to say Enterprise has a hurdle rate, we've never had a hurdle rate. We look at it and we say, "Okay, what's the upside? What's our risk?" And then we never do the economics without looking at sensitivities. I want to see economics with a 0 terminal value as a sensitivity, and then we will put in there what we think it really is. And then we decide whether or not we're going to pull the trigger. I was with a guy, I don't want to say who he is. But I told him, I said, "I thought they had an analysis-paralysis of everything they did." And he said, "Well, you guys [indiscernible] analyze." And I said, "We analyze. It's just that we don't do it until we're paralyzed. We do it to a point, we pull the trigger and we do the deal."

Timm, back to you.

One question I kind of had, and I want to real quick go back to the kind of this whole downstream push. Obviously, look, petrochemicals is going to be a bigger piece, a bigger pie -- or a bigger piece of the pie, if you would call it that, of your EBITDA, of your cash flow generation going forward. Would you guys ever consider selling upstream, what I would call more upstream-focused assets to get bigger on the downstream side?

I think there are -- there probably are some -- we wouldn't sell the core, if you would. I mean, for example, our pipelines out of the Permian or MAPL, but we might have something that we would take a look at not because -- it's not because we're going to grow in petrochemical. We're going to grow in petrochemical regardless. It's because it's the right decision that relates to that asset. Right now it's not the time to do it because I don't mean -- I don't think you can get a lot of -- people don't have money to spend. The thing that we are doing, though, is we're taking a hard look at everything we have. And we're looking at how we're going to recontract that. And in some places, we're saying, we're going to get into a [indiscernible]. But there are other places that, as these legacy contracts will roll off, we think we can get higher fees because of where we're positioned. So I think some of these legacy assets might be more valuable as the contracts roll out than you would think.

Got it. That makes sense. Another question I had, and I'm going to go off of memory here. I think I'm relatively close. So obviously, your storage position, and I think it's over 150 million barrels that you have across the NGL petchem value chain. Can you maybe talk a little bit as to how that -- how that is just a huge benefit as you're kind of pushing further downstream in this whole integration of the asset base?

You'll never see our storage assets put into a joint venture. That is the [indiscernible] for us. And what we've learned over the -- well, we knew it a long time ago, but it really paid off during this pandemic time. Storage is worth its weight in gold. I've said that on earnings conference calls. We have 250 million barrels of storage, and it gives us the ability -- when things fall apart, contango becomes the play. When things fell apart in March, April, we filled that storage. We converted NGL wells to diesel and gasoline and put a contango on those. We're doing the same thing in petrochemicals. It's not as liquid as I like -- as I'd like it to be. But I think as we grow in this business and as we add more connectivity, you're going to see the liquidity increase, but the storage is the [indiscernible] for Enterprise.

Got it. And P.J., I think we're at the allotted -- almost at the allotted time. So I just want to double check to see if there's any questions that came in on the line. And otherwise, I'll pass it back to Jim and Chris for any closing remarks you guys may have.

Let me ask one more question that came in. Can you discuss the merits of 15% returning projects versus repurchasing EPD units at the very strong diesel fuels today?

Yes. I was wondering when we would get that question. We're talking stock buybacks, right? We've bought back more this year than we said we would. Buybacks are opportunistic. We're not going to have a programmatic -- a buyback program, but we look at that routinely. Right now, if you're in the middle of a pandemic, I'm not sure right now is the time to buy back stock. I mean, I don't know what next week brings. So let's keep our powder dry. But if we have -- but it is a subject that we always look at. You've got Randy Fowler, myself, Randa and Hank Bachmann, our members of the office of the Chairman. We have a meeting every Friday, and I can tell you that subject comes up routinely. But in the middle of a pandemic, we're going to keep our powder dry. Next year, we have a lot of excess cash. It'll be a topic of discussion. You'll see us probably opportunistically doing some things.

Great. So we're almost out of time. Jim, do you have any final closing comment?

Yes. I really appreciate being invited, P.J., in your conference. Chris came from Dow. Actually, he was a Carbide guy to Dow during the acquisition. So he's really not [indiscernible]. But with our combined backgrounds -- and the first tower [indiscernible] ever built at Mont Belvieu was a propylene square. But we like primary petrochemicals. I think we're going to be careful. We're not going to step over the line and compete with our customers beyond that, but we like primary petrochemicals, and we think there's a way we can grow that without getting into their businesses. So thank you for inviting us. We appreciate it very much.

Great. We love having you. Thank you.

Take care, guys.

See you.