This Value Creator Just Won’t Stop
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You can only learn so much from a press release. Maybe companies think that their investors really don’t care; maybe the news really isn’t that big a deal in the grand scheme of things. I guess I am the curious sort and always want to know more so when Plains All American (NYSE: PAA) and Enterprise Products Partners (NYSE: EPD) announced a joint venture for their Eagle Ford crude oil pipeline, I had to know more. More importantly, does this combination really create value?
With natural gas prices low and NGL prices plummeting it only makes sense that we’ll see increased activity in more oil rich areas and one of the emerging domestic plays is found in the Eagle Ford Shale. As with the chicken and the egg, more production cannot happen unless producers can get their product to market. That’s where midstream powerhouses like Enterprise come into play and make increasing our domestic oil supply a reality.
In this latest project, Enterprise and Plains are entering into a 50/50 joint venture to consolidate certain portions of previously announced pipeline projects in the Eagle Ford. The deal is one of those rare win-win-win deals where both Enterprise and Plains will more efficiently use their capital to generate higher returns while their customers will gain access to more markets for their products, helping pricing.
From the press release the companies will, “include a 140–mile crude oil and condensate line extending from Gardendale in LaSalle County to Three Rivers in Live Oak County and continuing on to Corpus Christi, and a new 35-mile pipeline segment from Three Rivers to Enterprise's Lyssy station in Wilson County,” while the system will not include Plains Gardendale Gathering System nor Enterprises South Texas Crude Oil Pipeline. On the maps from recent investor slide decks you can visualize how this venture makes sense for both companies:
You must be wondering what the big deal is and why you’re even bothering with this article. As production in the Eagle Ford continues to increase it is driving returns at companies like Chesapeake (NYSE: CHK). In their earnings release they announced a 615% year over year increase in production. They specifically point out that, “Production growth in the play has been augmented by the continued build out of new compression facilities and new pipelines. Chesapeake expects price realizations for its Eagle Ford production to improve by approximately $5 per bbl beginning in October 2012 as new oil gathering pipelines and other infrastructure are completed.” This is why a project like the one Enterprise and Plains announced is a big deal. A $5 or more increase in their realized price per barrel is real value being created for shareholders.
Take another look at those maps and you can see that this project is perfectly placed in the crude oil section of the play. Not only that but it provides the access to multiple market destinations that shippers need. Now that's a competitive advantage and one that their customers notice.
Another company that’s called out the value provided by working with Enterprise in the Eagle Ford is EOG Resources (NYSE: EOG). In their earnings release they said that their, “marketing options for its prolific Eagle Ford production expanded in July when Enterprise Products Partners L.P. (Enterprise) began first commercial operation of the first phase of a 24-inch crude oil pipeline linking the Eagle Ford with extensive Houston area refining markets. Enterprise also has commissioned a new natural gas processing plant, as well as rich natural gas pipelines to gather and transport production to its Mont Belvieu NGL complex.” You know you’re creating value for your customers when they make a note of it in their earnings release.
While the press release announcing the deal might seem inconsequential, projects like these give Enterprise a unique set of co-competitive advantages. They have the assets other companies need to link into their systems. They are building relationships with their customers and competitors that continue to deepen thanks in part to their ability to create value for them. This in turn creates value for Enterprise’s unit holders, to the tune of 1,600% over the past dozen years, compared to just a 46% return for the S&P.
latimerburned owns shares of Enterprise Products Partners L.P. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.