EPX - Ethane Pipeline Income Fund

[So_Cynical]

And what great timing on your entry. Trading at 90c today so you've probably sold already

90c

i was asleep all day after working all night at the new job? 90c would definitely see me close this trade out.

 

[Smurf1976]

A bit of background info.

Natural gas from the ground contains a number of gases, not just the "natural gas" sold as such to homes and industry. The exact composition depends on the source, but for a conventional gas field (that is, gas that isn't from coal seams) then there are:

Methane - by far the largest component gas and the one commonly sold as "natural gas". The key point about methane is that whilst it can be liquefied, doing so is far more costly than delivery via pipeline. Hence liquefaction is normally only pursued when the gas needs to either be shipped internationally, or used somewhere that a pipeline doesn't go (eg gas powered ships, buses or trucks, or small power stations at remote sites with the LNG delivered by road tanker and the small volume not sufficient to warrant the cost of a pipeline). Nobody's going to truck LNG from Moomba to Sydney to compete against a pipeline.

Also notable is that keeping LNG stored as a liquid itself is problematic - you either need huge pressure (impractical in most situations) or you need to keep it refrigerated to -161 degrees C. In practice, it's normally just accepted that some of the LNG will "boil off" as it warms up - not a problem if it's sitting in a tank in Japan (for example) since you just feed the boiled off gas into the gas pipeline network for use by consumers along with the intentionally re-gasified LNG. But it wouldn't be economical to have a small LNG tank at a home or commercial building etc for this reason - it would be cheaper and easier to just use some other fuel.

Propane - a minor component and commonly sold as LPG (bottled gas). A key point is that propane is easily liquefied and this is the normal practice. It's a gas, normally stored and transported as liquid and can easily be kept in that state indefinitely - your gas BBQ runs on propane and nothing bad will happen if you leave the gas bottle sitting there unused for years. The gas won't evaporate etc. A steel container is all that's required to keep propane under pressure.

Butane - very similar to propane apart from a few different uses in petrochemicals and mixed with propane as automotive LPG. It's also the stuff in disposable cigarette lighters etc - it's a very easy gas to keep contained as a liquid even in a simple plastic container such as a lighter. In cold climates it is added to petrol to improve the properties of the petrol - in short it makes the engine a lot easier to start in cold weather since the butane is more volatile than the rest of the petrol. Butane is easily contained, eg in an aerosol can and if there was a hole in it then you could easily hold the gas in by putting your thumb over the hole. So it's a very easy to contain and transport gas.

Condensate - in short this just a very light, thin oil which is in a gaseous state underground but which condenses (hence the term condensate) to liquid at atmospheric pressure and temperature. It comes up with the gases, is then separated and sold as condensate. It is used at refineries the same as with other oil producing petrol etc. It is also sometimes added (most notably in Canada) to heavy (thick) oil to dilute it and enable easier transport in pipelines (a problem in Canada is that the oil is otherwise too thick to flow in the pipes, so they thin it with condensate to enable it to be pumped easily).

Most government and other energy statistics consider propane, butane and condensate to be "oil" not "gas". That is, statistics showing that the world uses 90 million barrels of oil per day are including propane, condensate, butane etc - indeed they're about 10% of the world's "oil" supply. These materials are also normally priced comparably to oil, since they basically compete in the same market - condensate goes into oil refineries, butane can be added to petrol, propane used to fuel vehicles and so on.

Also worth noting is that propane and butane are themselves produced at oil refineries ("refinery production") as well as occurring naturally in natural gas.

And then there's ethane. It can be either left in the "natural gas" stream without harm and sold to homes and industry with nobody aware that they aren't getting pure methane. This is actually what happens to ethane in in situations where there is no buyer for it as such, it just ends up getting sold as natural gas along with methane. Alternatively, ethane can be separated and used for petrochemicals. But it has a lower boiling point than propane or butane, such that whilst liquefaction and transport as a liquid is certainly possible it's much easier and more practical to use a pipeline instead.

Other gases - there are all sorts of things in natural gas such as helium, carbon dioxide and others but so far as fuel / petrochemical gases are concerned it's methane, propane, butane and ethane that are of primary use.

Coal seams - generally speaking, coal seam gas contains only methane and sometimes carbon dioxide in useful quantity. Anything else either isn't present at all (eg condensate) or is in such minor concentration as to be uneconomic to consider separating from the methane. So in practice, coal seam gas is a source of methane usually, and sometimes carbon dioxide.

So in the context of getting ethane to Sydney, realistically it's going to come from a conventional gas field in SA or Vic, the other options basically involving a pipeline from WA or NT to SA then joining the existing EPX pipeline anyway. The main rival to EPX is thus BHP / Esso at Longford (Vic) and a new pipeline to Sydney, with lesser potential for competition from other gas producers in Vic (Longford being by far the largest gas processing plant in Vic).

If there remains a market for Ethane in Sydney then realistically EPX are very likely to be transporting that gas there. There's a limit to pricing before a pipeline from Vic or a change of feedstock became economic (ethane isn't the only material that can be used - propane and even diesel can be turned into all sorts of things). But if Santos is producing ethane at Moomba, and there is a market for ethane in Sydney, then EPX is likely to remain in business.

 

[skc]

A bit of background info.

Thank you Smurf. You are always a well of knowledge in anything energy related.

If there remains a market for Ethane in Sydney then realistically EPX are very likely to be transporting that gas there. There's a limit to pricing before a pipeline from Vic or a change of feedstock became economic (ethane isn't the only material that can be used - propane and even diesel can be turned into all sorts of things). But if Santos is producing ethane at Moomba, and there is a market for ethane in Sydney, then EPX is likely to remain in business.

It's interesting game theory behind large scale, natural monopoly like investments such as a pipeline, undersea transmission cable etc.

With EPX, I guess the question is whether there is a substantial market in Sydney for ethane other than Qenos. My quick guess is No. You'd think EPX management would be aware of such and be negotiating plan B to supply those ethane users already, rather than saying plan B is to store natural gas in the pipes.

 

[Ves]

A bit of background info.

Excellent post. Thank you very much for the time and effort spent in putting it together.

What is your assessment of the risk in a stock like EPX? Would you be able to price it at all or am I correct in saying that it would be very hard due to the nature of the beast?

 

[So_Cynical]

(16th-April-2014) Been watching EPX since 2007, in today at 0.745 and hoping for the best as always...as mentioned previously EPX is a one trick pony, 1 suppler 1 customer and just the 1 asset and not even 1 employee.

Trade number 128 completed at the open, 24.8% profit with my part exit at 0.945...held on to a little over half of my shares for dividends and what ever surprises are to come.

Excellent result.

 

[McLovin]

A bit of background info.

That's great info smurf. Cheers.

 

[So_Cynical]

EPX up another 10+% yesterday and 2% today on the back of yesterdays 'Updated distribution guidance' announcement.

http://www.ethanepipeline.com.au/media/224011/2014 05 07 updated distribution guidance.pdf

Turns out the world wasn't ending and that Qenos continues to make plastic at Botany.

 

[So_Cynical]

Trading X - Dividend today, 02.3 CPS fully franked.

(16th-April-2014) Been watching EPX since 2007, in today at 0.745, Even with the new contract pricing and the reduced flow, a 25% + divided cut would still see a gross yield of over 11%

YOY for the quarter the gross dividend cut was 31% ~ so i can expect a 9.5% > 10% approximate Gross dividend going forward.

 

[So_Cynical]

(16th-April-2014) Been watching EPX since 2007, in today at 0.745 and hoping for the best as always...as mentioned previously EPX is a one trick pony, 1 suppler 1 customer and just the 1 asset and not even 1 employee.

(22nd-April-2014)Trade number 128 completed at the open, 24.8% profit with my part exit at 0.945...held on to a little over half of my shares for dividends and what ever surprises are to come.

Excellent result.

Surprise!

EPX up 30% today on the release of this announcement.

http://www.asx.com.au/asxpdf/20141113/pdf/42tpc45sc50kzb.pdf

In a nut shell: EPX and Qenos have come to an arrangement guaranteeing Ethane supply to the Botany plant until December 2018, thus dividends to remain at 3 > 3.25 CPS with 1 CPS franking credit every quarter going forward.

Nice just Nice. 100% open profit and absolutely nailed the bottom to boot, catching knifes will cut you that's for sure, but every now and then its a clean catch with pay-offs sufficient to justify the risk taken.

 

[coolcup]

On the back of its distribution guidance of 4-4.25 cents per quarter for the next few years (including franking) this looks to be offering a yield (grossed up) of 10.7% to 11.3%. Even if the distributions don't grow, this is a pretty good return now that the supply has been de-risked. Am I reading this right?

 

[galumay]

Am I reading this right?

I believe so, I do wonder if it will behave something like a corporate bond, its certainly setup like a fixed income instrument now. The uncertainty is what the capital value will do as it approaches 'maturity'. I wonder what realistic life the pipeline and agreement have, its thru to 2019 now, but unless varied again it reverts to the earlier PTA then.

This allows for the termination of the agreement with 12 months notice again and I guess the risk of it being exercised is the risk of the Quenos Botany Plant shutting down.

So the yield is good for the next 4 years, but will you be able to recoup your capital towards the end of that period?

EDIT - rereading Smurf's excellent post further up the page largely answers the questions i posed!

 

[So_Cynical]

The pipeline is a valuable asset that links the largest city/domestic market in Aust with the largest onshore gas field in Aust, in fact it runs along side the Moomba Cooper basin > Sydney gas pipeline...its just that its a more valuable pipeline doing what its doing at the moment.

Take away the Ethane/Qenos and the pipeline is still a considerable asset.

 

[Smurf1976]

The pipeline is a valuable asset that links the largest city/domestic market in Aust with the largest onshore gas field in Aust

Take away the Ethane/Qenos and the pipeline is still a considerable asset.

Vic market for natural gas is far larger than NSW, around twice the size, with WA also being larger. The overall NSW market is comparable in size to SA, the difference being in usage - mostly power generation in SAversus mostly non-electricity generating use in NSW.

Gas consumption by state as follows:

WA = 516 PJ (50% of total energy consumption including 53% of electricity generation)
Vic = 287 PJ (20% of total energy, 6% of electricity)
Qld = 235 PJ (18% of total energy, 22% of electricity)
NSW = 162 PJ (10% of total energy, 7% of electricity)
SA = 237 PJ (38% of total energy, 53% of electricity)
NT = 45 PJ (46% of total energy, 68% of electricity)
Tas = 16 PJ (14% of total energy, 13% of electricity)

That said, agreed that the pipeline would have an alternative use as a competitor to the Moomba - Sydney pipeline should there no longer be a market for ethane. It would likely bring lower returns however, since it would be competing against both an existing pipeline on the same route and alternative natural gas supplied from Longford (Vic). That's the more negative view.

The more positive view is that Vic gas is roughly 50% depleted (give or take a bit) so there's a limit to the extent of future production increase there. Moomba (Cooper Basin) is more heavily depleted, most of the gas has already been extracted, but it has existing links to Qld and there's a proposal for a NT - NSW pipeline that could involve connection to Moomba and a consequent long term increase in gas supply into NSW / ACT / SA / Vic / Tas via Moomba. In that context, both the existing pipelines (Moomba to Sydney and Adelaide) would see heavy usage thus leaving room for a second Moomba - Sydney pipeline. That's the more positive view.

On the other hand, if NSW were to seriously develop its' own gas resources then that changes the picture greatly. That doesn't seem likely at least in the medium term however for political reasons.

Now to throw in another one, unconventional gas in the Cooper Basin itself. There's shale there, it's just that so far it hasn't been economical to extract gas from it in significant quantity compared to using gas from other sources. That could certainly change going forward however.

So overall, future non-ethane usage of the pipeline would really depend on the pattern of development of other gas sources and pipelines. The level of gas used for electricity generation is a further complexity.

Failing all that, there's always storage. A gas pipeline itself stores quite a bit of gas, thus representing a short term trading opportunity. I'm not sure about others, but the owners of the Vic - Tas pipeline are pursuing that at the moment leading to a situation where, in theory at least, gas could flow into Vic from the Tas pipeline even though Tas has zero gas production. It's all about pressure changes in that context - build the pressure to maximum, then you can have gas flowing out both ends at once for a period. Then repeat the cycle. The profitability of such a strategy depends on short term fluctuations in gas prices (without that it would be financially pointless, though still of use in an engineering sense).

 

[So_Cynical]

Vic market for natural gas is far larger than NSW, around twice the size, with WA also being larger. The overall NSW market is comparable in size to SA, the difference being in usage - mostly power generation in SAversus mostly non-electricity generating use in NSW.

The more positive view is that Vic gas is roughly 50% depleted (give or take a bit) so there's a limit to the extent of future production increase there. Moomba (Cooper Basin) is more heavily depleted, most of the gas has already been extracted, but it has existing links to Qld and there's a proposal for a NT - NSW pipeline that could involve connection to Moomba and a consequent long term increase in gas supply into NSW / ACT / SA / Vic / Tas via Moomba.

Thanks for your input Smurf.

Glass half full and forward looking, gas is the growth energy source and NSW/Sydney the largest state and capital by population and GDP therefore potential market...the current Santos Moomba infrastructure is pretty much on top of the largest known shale gas deposit in Australia, a potential 200 TCF of Shale gas.

The Cooper basin will be producing Gas and will still be the largest onshore production area for many decades to come, the EPX pipeline has value going forward...for mine there is absolutely no scenario where it sits idol or is crapped etc.

 

[agumby]

takeover bid by APA, second time i will have had shares in a gas pipeline company taken over by them, last time it was Envestra

http://www.smh.com.au/business/ener...pipeline-income-fund-bid-20160306-gnc38d.html

 

[So_Cynical]

takeover bid by APA, second time i will have had shares in a gas pipeline company taken over by them, last time it was Envestra

http://www.smh.com.au/business/ener...pipeline-income-fund-bid-20160306-gnc38d.html

Second time for me too, was HDF 5 years ago...EPX has been one of my better investments, paid 75c for these back when the panic was on in April 2014, dividends every 3 months and almost tripled my investment.

I absolutely love a good panic.

 

[So_Cynical]

(16th-April-2014) Been watching EPX since 2007, in today at 0.745 and hoping for the best as always...as mentioned previously EPX is a one trick pony, 1 supplier, 1 customer and just the 1 asset and not even 1 employee.

Takeover by APA complete, check arrived in the mail today, 150% trade profit and 8 dividends totalling 25.74c per share ~ 34.6% return in dividends, not to shabby a result.

 

[System]

On June 16th, 2016, Ethane Pipeline Income Fund (EPX) was removed from the ASX's official list in accordance with Listing Rule 17.14, following compulsory acquisition by Australian Pipeline Limited as responsible entity of Australian Pipeline Trust.