The domestic shale drilling boom has been a very egalitarian get-rich-quick scheme. The global oil majors have, for the most part, struck out, while the pioneers few had heard of a decade ago have made it huge.

Fracked shale is producing windfalls all over North America, from Pennsylvania hills and Ohio plains to Colorado mountains and the Texas prairie. And all it takes to get into the game is some capital, leases and a rig.

The huge returns on offer in prolific basins that haven’t yet been fully explored means they will be explored and exploited in due course, adding to the rising tide of domestically sourced hydrocarbons.

But maximizing the value of this bounty requires investment on a scale most drillers can only dream of. That profitable business is anything but a democratic free-for-all, dominated by a few large partnerships and companies.

This piece explores the last and most lucrative link in the hydrocarbon value chain: processing the liquids extracted from natural gas into liquefied petroleum gas (LPG) for export. In addition to technology and capital, this is a business that requires vertical integration and continent-spanning pipes as well as highly specialized port facilities and a global roster of customers.

Fueling the World

Today, the natural gas liquids (NGLs) are increasingly funneled to the Gulf Coast, which has the ports, the pipes and the plants. Almost as important is the Gulf Coast’s geography, suitable for supplying LPG to Central and South America, Europe and, increasingly in the years ahead, Asia via a Panama Canal that will soon be widened with this trade in mind.

US LPG exports averaged 426,000 barrels per day over a four-month stretch through the end of January, roughly double the pace a year earlier, according to the US Energy Information Administration. 


In as little as 18 months, port expansion will permit the industry to export twice as much, according to a recent survey by ICF International. The consultancy is tracking nine separate projects with an aggregate export capacity of 1.3 million barrels per day set to be completed over the next three years at a cost of nearly $4 billion.


The party’s only getting started according to Enterprise Products Partners (NYSE: EPD), the leading US NGL fractionator and LPG exporter, which is expecting years of persistent domestic oversupply based on booming production from shale. 


Propane currently makes up the bulk of LPG exports, and Enterprise accounted for more than three-quarters of US propane exports last year, vaulting the US past Qatar and Saudi Arabia as by far the biggest global supplier.

The Western hemisphere absorbed 70 percent of US exports last year, but Europe is a growing market based on the persistent and significant premium propane fetches there over its price on the Gulf Coast. And ethane, the less valuable NGL component only just emerging from an epic market glut in the US, is likely to carve out a much bigger European export market in the coming years.

Enterprise estimates that a typical European petrochemical cracker with an annual production capacity of 1.5 billion pounds would save $600 million a year by converting to use ethane as a feedstock instead of naphtha derived from crude oil.

Similar considerations obtain in Asia, where naphtha and LPG are even more expensive, and where the growth in demand for petrochemicals remains hectic. Three weeks ago, Phillips 66 (NYSE: PSX) signed a long-term deal to supply the big new ethylene plant Sinopec (NYSE: SHI) plans to build in China with US propane from an LPG export terminal Phillips 66 plans to build in Freeport, Texas by the fall of 2016.

Enterprise on the Rise

For the moment, though, Enterprise remains the unchallenged 800-pound gorilla in US LPG exports. Its NGLs flow from the partnership’s 24 gas processing plants, scattered across Colorado, Louisiana, Mississippi, New Mexico, Texas and Wyoming, down some of its 19,400 miles of NGL pipelines to the US fractionation capital in Mont Belvieu, Texas, where the undifferentiated NGLs are purified into propane and butane for LPG export.

Enterprise holds a full or partial interest in 15 Texas and Louisiana NGL fractionators, including the eight at Mont Belvieu that account for more than 60 percent of the partnership’s 929,000 barrels per day of net fractionation capacity.


From Mont Belvieu, LPG is sent by pipeline to the Enterprise export terminal on the Houston Ship Channel, expanded a year ago to load up to 7.5 million barrels a month of LPG, from the prior 4 million. A year from now, the loading capacity is expected to increase to 9 million barrels, and subsequently to 16 million barrels per month. Current capacity is almost fully booked until 2017.

NGL pipelines and services accounted for just over half of the gross margin last year, and fractionation profits showed an outsized increase from 2012 as LPG prices perked up after a deep slump. As the dominant LPG exporter, Enterprise remains our top-ranked Best Buy and a Conservative Portfolio mainstay. Buy EPD below $75.

Targa’s Meal Ticket

Smaller rival Targa Resources (NYSE: TRGP) and its sponsored MLP affiliate Targa Resource Partners (NYSE: NGLS) are more concentrated bets on NGLs and LPG exports. Despite dabbling in crude oil, Targa derives most of its profit from NGLs.

 Its 11 gas processing plants in Texas, New Mexico and North Dakota, fed by Targa gathering systems, produced 92,000 barrels of NGLs per day last year for the two wholly owned fractionators in Mont Belvieu and Lake Charles, Louisiana, along with a partial non-operating interest in a third Mont Belvieu fractionator.

Those facilities have a gross fractionation capacity of 573,000 barrels per day. They, in turn, supply  Targa’s Galena Park export terminal on the Houston Ship Channel, enlarged last year to load up to 4 million barrels of LPG a month onto the largest LPG carriers. By the third quarter of this year another expansion should boost shipping capacity to as much as 6 million barrels per month.

On March 31, Targa raised its fiscal 2014 profit guidance 10 to 18 percent above the prior forecast, crediting “the strength of the LPG export market” and Galena Park’s performance since the expansion first and foremost. TRGP and NGLS are both Growth Portfolio picks. TRGP, our #6 Best Buy, has returned 32 percent since the original Nov. 15 recommendation. Buy TRGP below $105 and NGLS below its increased limit of $63

Nederland’s Next

On a much smaller scale, Sunoco Logistics (NYSE: SXL) is expected to begin moving up to 70,000 barrels of NGLs per day from fractionators in the Marcellus Shale eastward to its recently converted Marcus Hook LPG export terminal below Philadelphia. Shipments are set to start in the second half of this year, and the partnership is already soliciting customers for an expansion phase that would connect Marcus Hook to several Ohio fractionators processing NGLs from the Utica.

Meanwhile, SXL’s crude and refined products terminal in Nederland, Texas is slated for additional duty early next year as an LPG export hub for Lone Star NGL, a processing venture between two of its affiliates. The parent partnership Energy Transfer Equity (NYSE: ETE) owns 70 percent of Lone Star, and Regency Energy Partners (NYSE: RGP) the rest. Lone Star operates 2,000 miles of NGL pipelines, three gas processing plants and three fractionators (two in Mont Belvieu and one in Geismar, Louisiana) with an aggregate fractionation capacity of 251,000 barrels per day. Nederland will be linked to Mont Belvieu by pipeline and will have an initial export capacity of 6 million barrels per month. Shell (NYSE: RDS-A) subsidiary Shell Trading is a committed anchor customer. ETE and SXL are on our list of Best Buys, but LPG exports will account for a relatively minor portion of each partnership’s business.

Last year, Occidental Petroleum (NYSE: OXY) publicized plans for an LPG export terminal with the capacity of some 2 million barrels per month on the site of a former Navy base it bought near Corpus Christi, Texas. This project was reportedly scheduled for completion late next year subject to commercial demand, though the only use listed for the site in the latest annual report is as a planned location for a chemical plant.

By mid-2016, the Phillips 66 terminal in Freeport is due on line, with an initial capacity of 4.4 million LPG barrels a month.

Less certain is the fate of a planned Lake Charles, Louisiana LPG export terminal to be operated under a joint venture between Williams (NYSE: WMB) and Boardwalk Pipeline Partners (NYSE: BWP), if that pair can successfully market the proposed Bluegrass Pipeline linking the terminal to NGLs from the Marcellus.

By the estimates of many of the sponsors of these projects, two years hence the supply of additional NGLs from shale wells will have more than justified the building spree. It had better, for the sake of the late arrivals.