Energy Transfer, Sunoco’s parent company and owner of the Dragonpipe (Mariner East pipeline system) conducted its quarterly conference call for financial analysts on May 11. The tone was remarkably optimistic, given the economy, the pandemic, the crisis in the oil and gas industry, and the fact that ET reported a loss of $855 million for the quarter.
Very little was said about Mariner East. But I found the call interesting for other reasons.
Mariner East delays. A few sentences of the company’s prepared statement concerned Mariner East. ET reported that the agreement with the DEP to resume permitting last winter “will allow us to complete the construction of projects we have underway in Pennsylvania.” The announced completion date “for the next phase” of Mariner East (it was not specified whether that meant completion of ME2X or completion of the original ME2) was pushed back to Q1 of 2021, and completion of “the final phase” was pushed back to Q2 of 2021. The statement also mentioned that expansion work at Marcus Hook will permit an additional 50,000 barrels/day of product to move through the terminal in early 2021 (an increase of about 22%).
As usual, there was no mention of any of the construction problems or legal/regulatory difficulties with the pipelines. No reasons were given for the delays (which have become a routine feature of ET’s Mariner East announcements).
Optimistic tone. In answering analysts’ questions, the tone taken by management was astonishingly optimistic. I had not expected optimism, given the circumstances. It is not surprising, perhaps, that the loss of $855 million for the quarter was ignored—that was basically due to a bookkeeping change (a write-down to recognize the inflated value of some assets) without which ET would have shown a small profit. But the company’s optimism about the state of the industry was unexpected. You can listen to a recording of the hour-long call here.
As Marshall McCrea, ET’s President, said in response to a question, “So, from an Energy Transfer perspective, we think things have bottomed out. How quickly they’ll grow remains to be seen. But we do expect, if not faster growth, at least gradual growth for the next quarter.” In my reading of the press about the oil and gas industry, this is the only expression of near-term optimism that I have encountered. But McCrea sounded as if he believed it, and was not just putting on an act to generate favorable coverage by the analysts on the call.
ET depends on the health of oil and gas drillers to keep its pipelines full (although for the near term, it has contracts that require shippers to pay, whether or not they actually use their pipeline space). The call never touched on the questions of whether the company might be affected by customer bankruptcies in the immediate future or lower volumes later on, when current contracts end.
Increased focus on Liquefied Petroleum Gas (LPG). The call put a lot of emphasis on ET’s pipelines, processing plants, and export capabilities for LPG. LPG is a compressed mixture of butane and propane that is widely used for cooking in the developing countries of the world, and ET has been increasingly investing in supplying it. In the target markets, it is sold in pressurized returnable canisters, similar to the way propane is often sold in the US. ET has been adding to its LPG-related investments and now apparently sees LPG as the bright spot in an otherwise gloomy oil and gas market.
Ethane, which has been the key product in the development of Mariner East, was barely mentioned on the call.
Crude oil was also a minor feature of the call. ET doesn’t handle much crude oil, so the crisis in crude oil pricing has not had much effect on the company’s business. But ET did make one curious crude-related move: it made a successful bid for 6.2 million barrels of storage capacity in the Department of Energy’s Strategic Petroleum Reserve. ET itself has no use for that storage, but in the current glut many oil producers are desperate for it. This seems to be simply an opportunistic move on ET’s part to purchase something unrelated to its core business that it can turn around and sell for a profit.
It seems evident that ET is banking on being correct about two main factors: a quick recovery in the oil and gas market, and a steady demand for LPG. ET’s financial future will depend heavily on whether these bets are right. Perhaps we’ll get a better sense of that on the next quarterly call.
Dragonpipe Diary 