Enterprise Plans Second PDH Unit

Enterprise Products Partners L.P. ( EPD - Analyst Report ) plans to build its second propane dehydrogenation (PDH) facility, in view of the expected decline in propylene supplies in the U.S.

The partnership’s first PDH unit is expected to come on-stream in the third quarter of 2015, bringing approximately 1.65 billion pounds per year (750,000 metric tons per year or 25,000 barrels per day/bpd) of new polymer grade propylene (PGP) capacity to the U.S. market. It has also entered into a long-term agreement to effectively sell output from this facility.

Enterprise did not provide details related to the capacity of the second facility or a construction timeframe. The first PDH plant will be connected with the partnership’s existing propylene fractionation plants, its PGP storage facilities, 102-mile distribution pipeline system and export terminal.

Many companies are considering the construction of PDH plants, as the new techniques of shale gas makes both propylene supplies tight and propane prices cheap. Producers have changed from naphtha to lighter natural gas liquid (NGL) feedstocks like ethane and propane, with the arrival of shale gas development. These lighter feeds produce lesser quantity of propylene.

Enterprise intends to utilize the growing supplies of propane as feedstock for its PDH unit to offer another source of competitively priced PGP. Enterprise stated that it has strong demand for the remaining capacity in its PDH unit. This is mainly attributable to a 38% cut in propylene supplies since 2006 for additional ethane cracking as well as for the continuous surge in domestic propane supplies from the U.S. shale plays.

We continue to view Enterprise Products Partners as a core holding in a master limited partnership (MLP) portfolio, given its string of organic growth projects, potential acquisitions, strong balance sheet and solid liquidity position. The partnership is one of the largest fully integrated midstream service providers with a positive long-term outlook given its significant geographic and business diversity.

However, we remain on the sidelines considering the lower NGL pricing environment. Enterprise also remains vulnerable to macro conditions and unstable oil and gas prices, which could in turn hurt its margins in NGL, natural gas and other businesses.

Enterprise Products Partners, which recently entered into a 50/50 joint venture with Plains All American Pipeline, L.P. ( PAA - Analyst Report ) for a crude oil pipeline in South Texas, holds a Zacks #3 Rank (short-term Hold rating). Longer term, we maintain our Neutral recommendation.