Enterprise Products cuts 2020 capital spending by $1.1 billion

Enterprise Products Partners said Wednesday it will slice its 2020 capital spending by more than $1 billion and delay projects as it adjusts to the rapidly changing energy environment triggered by the global coronavirus pandemic.

The roughly 28% reduction in capital spending includes cutting its growth capital from about $3.5 billion to $2.5 billion and its maintenance capital from $400 million to $300 million. Further reductions could come as Enterprise negotiates new joint ventures or changes and reviews other projects, the firm said, as the midstream sector adjusts to declining business and volumes.

Enterprise no longer expects to receive federal approval this year on its Sea Port Oil Terminal Project, called SPOT, putting at least a pause on the race to build deepwater, oil-exporting terminals offshore of the US Gulf Coast. In a joint venture with Enbridge, SPOT would be built offshore of the Houston area. But now it isn't even being counted in Enterprise's 2021 or 2022 capital budgets, although it already received a final investment decision.

The only project that Enterprise is definitively canceling thus far is a planned expansion of its butane isomerization facility in Mont Belvieu.

But Enterprise will delay several others, including its planned Midland-to-ECHO 4 expansion from the Permian Basin to the Houston area. Phase three is slated for completion this fall. Enterprise also will delay some terminal and storage tank expansions near Houston.

"The speed and intensity of this economic sudden stop for developed countries has been breathtaking. We expect natural gas, NGL and crude oil production to decline more rapidly than in previous supply shock cycles," said Enterprise co-CEO Jim Teague in a statement.

US crude production has already fallen 1 million b/d since mid-March to 12.1 million b/d the week ending April 24, US Energy Information Administration data shows. However, S&P Global Platts Analytics estimates that the US needs to reduce output by over 3 million b/d over the next two to three months to help balance the market.

CAPTURING CONTANGO

Enterprise has not yet seen material changes to its volumes, Teague added, but the pipeline, processing and exporting firm is far from immune. Enterprise is using its un-contracted storage capacity to capture as much contango for its customers as possible, he said, to help offset declining volumes.

"Our storage is worth its weight in gold," Teague said during the earnings call.

Enterprise has converted some storage tanks to hold crude oil and switched at least three storage wells at its Mont Belvieu hub in Texas to store more refined products. Enterprise also recently reversed a portion of its Seaway Pipeline system to carry more crude back up to the Cushing, Oklahoma storage hub, which is nearing full capacity.

"We've been pleasantly surprised with how much crude storage we've had access to," said co-CEO Randy Fowler, also on the call, about some of the more creative measures being taken.

"Our crude pipelines are fully contracted and Seaway is virtually full," Teague added.

He emphasized that all of the crude pipelines are locked in with long-term, take-or-pay contracts, so the cash flow will continue.

When asked about concerns of producers possibly seeking to declare force majeure to cancel pipeline commitments, Teague attempted to brush off such issues. Any attempts likely would lead to legal disputes, he said.

"We would call that a price majeure, and that's not in our contracts," Teague said.

Midstream analyst Ethan Bellamy of Robert W. Baird & Co. said Enterprise's earnings results and commentary show how balancing everything well during the global demand collapse from the pandemic. For instance, Enterprise touted growing profits from LPG volumes and exports.

"Enterprise is clearly a COVID-19 survivor," Bellamy said. "The Enterprise call highlighted the benefits of a robust balance sheet and a diversified business, with every hydrocarbon in contango."

NET INCOME GROWS 7%

With the global demand collapse not taking hold until March, Enterprise's quarterly net income actually grew 7% from the first quarter of last year up to $1.35 billion.

Enterprise expects to hold its 2021 capital spending to $2.5 billion and lower its 2022 budget to $1.5 billion.

Teague also veered into political territory, comparing the responses to the coronavirus pandemic and the 1950s polio outbreak.

"What I don't remember is shutting down the entire economy," Teague said.

"The key to a recovery for the energy industry will be the restart of the global economy; the timing of which is unknown at this time," he added.