They’re Building a What?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Have you ever read a press release from a company you are following and they announce this brand new project and you have no clue what the thing will do? They fill the release with numbers and big words and you’re left there scratching your head and thinking this thing better work. If you had your wish the press release would be announcing a dividend increase or at least something you’d heard about before.
So try this one on for size, back in June Enterprise Products Partners (NYSE: EPD) announced they were building a Propane Dehydrogenation Unit. Based on what they are calling it, if I were to venture a guess I’d say the thing takes hydrogen out of hydrocarbon but what do I know. So of course my curiosity has gotten the best of me and what I found out is worth sharing.
The unit, to be one of the largest of its kind in the world, will produce 1.65 billion pounds per year of polymer-grade propylene (PGP) -- a fancy way of saying that they are making the top of the three quality grades of propylene, the other two being refinery grade and chemical grade. This top quality propylene is then used to make polypropylene plastics which are sold into markets for automotive applications, textiles and coatings among others. Think of propylene as a building block for many chemical and plastic products.
Without getting into the technical specifics, the basic premise is that they’ll make this polymer-grade propylene by using propane as their feedstock. Propane which is made up of 3 carbon molecules and 8 hydrogen molecules or C<sub>3</sub>H<sub>8</sub> will now have a molecular formula for propene or propylene of C<sub>3</sub>H<sub>6</sub> with hydrogen as a byproduct. Bottom line is that they’ll be taking propane which is now in abundance as one of the NGL’s produced from shale and filling the void in the propylene supply.
The project which will be licensed and engineered by CB&I (NYSE: CBI) is one that CB&I’s CEO said is, “an example of the rebirth of the US petrochemical industry due to the abundance of propane feedstock attributed to the growth in NGL’s as a result of shale gas production.” It’s also one in which they won’t have any commodity risk involved as instead it will be supported by long-term, fee based contracts. Finally, the project will take several years to go through the approval and construction process and won’t begin commercial operations unit late 2015.
In case you are wondering, Enterprise won’t be the only company that produces polymer-grade propylene when the project is finished. CP Chem which is a joint venture between Phillips 66 (NYSE: PSX) and Chevron (NYSE: CVX) already produces 3 billion pounds of it annually. Dow Chemical (NYSE: DOW) is also a top producer of PGP in the US. What is unique about this project is that it is using propane as a feedstock instead of oil which is the more common way of producing propylene. It will also be an extension of their propane value chain while filling a critical need for advancing the utilization of our abundant domestic resources. Unlike CP Chem or Dow, the Enterprise system is generating fee-based income as opposed to product revenue.
What I like most about it is that Enterprise saw the supply and demand imbalance where propane is in high supply and propylene is in high demand and they found a solution to the problem. Enterprise’s management team is one of the best in the midstream industry in strategically allocating capital by building assets that their competitors cannot replicate because of how well they integrate them into their vast network of pipelines and services. I still don’t know exactly how you dehydrogenate propane but Enterprise does, and this unit combine with the rest of their $8 billion worth of projects in the pipelines are going to continue to drive shareholder returns for years to come.
latimerburned owns shares of Phillips 66 and Enterprise Products Partners L.P. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Chevron and 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.
