On August 8, Energy Transfer had its quarterly conference call for investors and financial analysts. As a business, the company claims to be doing very well these days. And yet, its stock price (ticker symbol ET) is going nowhere. On August 3, it hit $13.30, its lowest point in more than six months. While the broad market has been dropping recently, ET has been dropping faster.
But neither the business results nor the stock price was the reason I was listening to the call. I wanted to see what the company would say about Mariner East. Would ETP management acknowledge any of the remaining hurdles to completion of the pipelines? Would they push back completion dates again, as they had frequently done in the past? Would there be any sign that they were tempering their expectations for what they could accomplish in Pennsylvania?
A rosy view of Mariner East and Marcus Hook expansion. In the prepared statement that occupied the first half of the hour-long call, there was a brief discussion of Mariner East. With both pipelines running (ME1 and the “Frankenpipe” that Energy Transfer refers to as ME2), the company says it is averaging 230,000 barrels per day from western PA to Marcus Hook. It ships an additional 70,000 barrels per day by truck and train, for a total of 300,000 barrels per day. (The use of trucks and trains shows that Energy Transfer has not been able to fulfill its contracts with its existing pipelines.)
ME2X construction was said to be “99% complete”, and “we continue to target having the pipeline in service by late 2019”.
The company referred to unspecified “facility capacity expansion” plans for Marcus Hook, scheduled for next summer, and it said it may finally get around to constructing “additional off-take points … to serve the Harrisburg, Reading, and Greater Philadelphia markets”, the key “benefits to the state of Pennsylvania” that it promised from the start but never delivered. The company is also considering building a propane dehydrogenation (PDH) facility and an alkylation unit at Marcus Hook.
[The PDH process is used to convert propane to propylene (which is primarily used for plastic production). Alkylation is used to make isooctane, a gasoline additive. It was, of course, the alkylation unit at the Philadelphia refinery that blew up last month.]
Questions about Mariner East. In the Q&A part of the call, industry analysts were able to ask ETP management questions about their plans. Two of the analysts had questions about Mariner East. Shneur Gershuni from UBS asked about the possibility of using one of the Mariner pipelines to transport refined products (such as gasoline) instead of NGLs, from western Pennsylvania to Marcus Hook. That would help fill the gap in the market left by the closing of the Philadelphia refinery. Mackie McCrea (ETP’s COO) answered that, yes, that was something they were looking at.
This was an interesting option I hadn’t heard discussed previously. But it was the next set of Mariner East questions that really got my attention.
Dennis Coleman, of BOA Merrill Lynch, started by asking what the uncompleted final 1% of ME2X consisted of. Kevin Smith (ETP’s EVP for Engineering and Construction) answered: “We still have a number of HDDs and [water] crossings to complete. That’s all going per the plan… We’re still very confident that we’ll be able to put ME2X in service by end of the fourth quarter.”
Coleman then asked about the “work-around” on ME2. (This referred to the fact that ETP failed to complete its 20-inch ME2 in 2018 and instead cobbled together multiple pipes—some old and some new, and of various diameters—into what it is calling “ME2”.) Had that been fixed, Coleman wanted to know, or was that part of the 1% to be completed later this year?
There was a pause. Then Tom Long, ETP’s CFO, said “We’re not sure what you mean by the work-around of ME2”. Coleman explained: “Well, you had the pipe that you repurposed to make ME2.”
After another pause, Long answered: “Right now, we’re focused on getting ME2X in, which will give us three pipelines through that area to Marcus Hook. And then, later in 2020, we’ll finalize the last segment [of ME2] which will give us the maximum capacity that we’ll need in the future through that area into Marcus Hook.”
What to make of the Mariner East comments. My takeaways from the call were:
- Energy Transfer really expects to have the 16-inch ME2X in operation by year’s end (or at least, that’s what they want investors to think).
- They expect to finish the 20-inch ME2 sometime in 2020, and in the meantime they will operate the patched-together “Frankenpipe”.
- They are working on unspecified “facility expansion” in Marcus Hook, despite losing their air-pollution violation case with the DEP.
- They are considering the construction of additional processing facilities in Marcus Hook.
Each of these ideas is problematic. For starters, I think there is very little chance that ME2X will be completed this year. If it is not, will Energy Transfer resort to another “Frankenpipe” ruse, using some other pipe and calling it “ME2X”? I have to think that top management is not getting accurate information from the field about what is actually happening: the construction problems, the legal issues, the regulatory cases, and the increasing public outcry. To assume that everything will go smoothly with the remaining construction required for ME2X requires either a significant leap of faith or—more likely—ignorance of the real situation. Or could it be that top management really does understand the situation but is intentionally misleading investors? The same reasoning applies to the plans for the remaining still-to-be completed sections of 20-inch pipeline.
At Marcus Hook, where the DEP found systematic and intentional bypassing of air-quality regulations, the plans for continued expansion suggests that Sunoco is ignoring the requirements the DEP has placed on it. Is the “facility expansion” in accord with DEP regulations? What’s happening with the equipment that Sunoco already built that is in violation of regulations? Is the concept that the DEP even regulates air pollution at Marcus Hook a total sham? The DEP needs to step in and shut down Sunoco’s construction until it can be shown that is compliant. That is the only way that the DEP will restore public confidence that it is capable of limiting the pollution of our air.
Back in February, Energy Transfer claimed that it had finally learned that “every place is not Texas” and that it had to do a better job in Pennsylvania. This earnings call seems to show that no real lessons were learned. The company is barging ahead in just the way it apparently is allowed to do in its home state.