A Huge Energy Opportunity for the Next 25 Years

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Natural gas production has been taking off across North America, requiring new pipelines to move that gas from where it's produced to where it's consumed. A recent study from an industry trade group has concluded that spending on pipelines must double over the next 25 years. Read along, and I'll explain where the money will be spent, why, and how you can profit.

In the past few years, new technologies and cheaper costs allowed producers to access gas trapped in parts of the U.S. previously considered unreachable. As more companies have tapped these unconventional plays, U.S. natural gas production has risen roughly 25% over the past five years, to 78 billion cubic feet per day, or Bcfd for short. Experts expect production to keep rising over the next 25 years, to 113 Bcfd by 2035.

All this new gas needs a lot of new pipelines. According to a new study by the Interstate Natural Gas Association of America (INGAA) Foundation over the past 10 years, companies spent an average of $4.6 billion per year to build 14,600 miles of expansion pipeline. For the U.S. and Canada to maintain efficient, well-functioning natural gas markets, INGAA has concluded that we'll need to spend an average of $8.3 billion per year between now and 2035. That doesn't include the $1.3 billion a year of pipeline infrastructure that oil production will likely need. Combine these two, and at $9.6 billion a year on infrastructure, that's more than a 100% increase in spending for the next 25 years.

INGAA projects that we'll need 43 Bcfd of expansion mainline capacity from 2010 to 2035. Besides major regional lines, smaller pipeline laterals will need to connect new power plants, storage fields, and processing facilities to the natural gas transmission network, with expected investments of $5.7 billion per year. New gathering system pipelines will also be required to connect new producing wells to processing facilities and pipelines, with an expected investment of $2.6 billion per year.

Remember the Gold Rush
Now, some would have you think that you can best play this opportunity by investing in major pipeline operators Kinder Morgan Partners (NYSE: KMP  ) or Energy Transfer Partners (NYSE: ETP  ) . I think there's a better way. Remember the California Gold Rush: The miners didn't get rich, but the people who sold the picks and shovels sure did. Who'll make the most money during this pipeline rush? Enter the folks who make pipes -- or, if you want to be all formal, "oil country tubular goods," or OCTG.

Put that in your pipe
There are many pipe makers to choose from, but a few stand out.

U.S. Steel (NYSE: X  ) is the largest player in the North American OCTG market, thanks in part to its 2007 acquisition of Lone Star Technologies, the leading producer of welded OCTG in North America. But oil and gas pipes only represent about 15% of U.S. Steel's business. There are better ways to take advantage of the increase in pipelines.

Ameron (NYSE: AMN  ) specializes in molded fiberglass pipe and fittings. The oil and gas processing industry uses these products as an alternative to metal pipes, since metal pipes corrode over time. While Ameron won't be making the massive pipes transporting natural gas, it will have a hand in the refineries and oil platforms needed to get that gas to consumers. Ameron's fiberglass pipes are also used in service stations, and the company would benefit from a shift toward more natural gas vehicles and service stations. The pipe group makes up 44% of Ameron's business, with a water transmission group making up 43%, and a concrete and aggregates group making up the last 13%. (Editor’s Note: On Tuesday, after this article was published, National Oilwell Varco announced it was acquiring Ameron for $85 a share, a 28% premium to Ameron’s closing price on July 1.)

That said, I'm most interested in Tenaris (NYSE: TS  ) , a global producer of OCTG products based in Luxembourg. It's well-positioned to capitalize on the pipeline boom, since tubular products make up 87% of Tenaris' business. A huge chunk of that comes from North America:

Tenaris is not particularly cheap. Its $1.2 billion in earnings over the past 12 months give it a P/E ratio of 22, in line with peer OAO TMK. (U.S. Steel was not profitable this past year.) However, Tenaris' direct exposure to the OCTG business should allow its investors to best cash in on the pipeline boom.

Foolish bottom line
Natural gas is changing the face of energy in North America. By investing in the suppliers to the boom, investors will best position themselves to profit without taking huge risks. If you're still looking for more ideas, check out The Motley Fool's free report "The Only Energy Stock You'll Ever Need." In it, Fool analysts detail a company that will also benefit from the pipeline boom. Click here to grab a copy.

Fool contributor Dan Dzombak holds no position in any company mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (29) | Recommend This Article (124)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 01, 2011, at 5:54 PM, prginww wrote:

    Assuming the premise of the article actually occurs (we'll always have politicians to screw things up), there are still too many variables to consider in trying to estimate whether steel or other pipe makers can make consistent profits over a 25 year period. Demand for pipe goes up, how much do input prices go up, e.g.

    On the other hand, if natgas demand even remotely increases to the levels predicted, the toll takers will be assured of dramatically increasing cash flow and payouts. Given the profit history of X the last 25 years, I'm not convinced I'll do better than my investment in KMP.

  • Report this Comment On July 01, 2011, at 6:14 PM, prginww wrote:

    Tenaris is actually based in Argentina (not Luxembourg). It is indeed a great company, manufacturing some of the highest quality products in the pipeline business. The fact that it is based in Argentina (instead of a respectable country as Luzembourg) could be relevant for anyone considering investing in it, since the government has increasingly interfered in everything corporate. Bear in mind:

    - Chavez expropriated some TS's manufacturing plants in Venezuela, and Cristina Fernandez (Arg's "presidentess"), who habitually and vociferously supports everything that Chavez does, completely ignored it.

    - Last year the government expropriated all private pension (and some mutual and investment) funds. Being now a major shareholder in most of corporate Argentina, the gov is trying to force companies to invest money in the country, instead of abroad, and to repatriate capital. This is in part because institutions are so weak, that capital is being repelled, and in part, to play the populist's part, satisfying the masses desire to punish private businesses, so frequently found in third world countries.

    - The country's economy depends on agricultural products (we've been compared, rightfully so with middle east oil countries). Even though unlikely, a significant drop in soy prices would definitely screw the economy ().

    - Rampant corruption as never seen before in the history of the country, fraud in ballots, arbitrary and ambiguous laws enacted everyday handing the gov more power.

    All of that doesn't mean tenaris can't be a terrific investment, but you should be aware of the political risks of investing in emerging markets like this. The GDP may be growing, but the institutions are an increasingly inhospitable place for business.

    Good luck and good investing!

    *references: i'm argentinian

  • Report this Comment On July 01, 2011, at 6:25 PM, prginww wrote:

    Once again, TMF's depth of research is in question. There's a big difference between Luxembourg and Argentina.

  • Report this Comment On July 01, 2011, at 9:06 PM, prginww wrote:

    Three things

    1 In the City of NY the existing gas lines are being replaced with a rubber type line that

    lasts 10 times longer then steel

    2 Anaerobic digester's are becoming more common in the US both for animal waste and human waste

    3 The EPA is looking into fracking due to the chance that there can be ground water contamination

  • Report this Comment On July 01, 2011, at 10:22 PM, prginww wrote:

    Pipe is a commodity. If you want to play nat gas/fracking services, look at Carboceramics (CRR).

  • Report this Comment On July 02, 2011, at 2:09 AM, prginww wrote:

    You just forgot Tenaris main competitor, Vallourec, based in France

  • Report this Comment On July 02, 2011, at 12:08 PM, prginww wrote:

    @ Convex - thanks for that assessment of the state of affairs in Argentina. I was invested in PZE for a while but have since dropped it again as the political situation seemed so unstable. Pity, really, as TS (as PZE) seem to be decently managed companies, but you can't fight political headwinds forever.

  • Report this Comment On July 02, 2011, at 8:40 PM, prginww wrote:

    Insiders Sound an Alarm Amid a Natural Gas Rush

    published by the NYT on June25, 2011

    What about this (cited from the article):

    “Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. “Reminds you of dot-coms.”

    An article like that should at least be mentioned, instead of going overboard with gold rush ideas.

    Like Bonefish100 I sometimes wonder whether TMF's research can be trusted; some of the Global Gains stuff that I have been reading has been outright ridiculous (I share my time between Europe and Australia and have some inside knowledge of some of what the Global Gains guys write about)

    And sometimes some TMF authors seem to be a bit naive.

    Has TMF by now grown to be too big and too greedy?

    The "Economist" has favorably judged TMF, but that was many many years ago. Has anyone seen a recent favorable opinion on TMF in a publication "beyond doubt" like the "Economist" or the NYT or the WSJ?

    Why do I as a subscriber have to dig through mountains of ad emails to get through to some hopefully serious information?

    I really wonder whether my TMF subscription fee is money well spent.

  • Report this Comment On July 03, 2011, at 10:02 AM, prginww wrote:

    The article linked below sheds some more light on the whole natural gas pipeline issue:

    I'd like to hear Dan's reply to the information presented by Convexflow. We need good quality information here at MF and one of the best attributes of the site is the wide ranging experience of its users and their willingness to share their knowledge. But the MF analysts need to do their homework first to really maximize the usefulness of the site.

  • Report this Comment On July 03, 2011, at 1:58 PM, prginww wrote:

    Tenaris headquarters

    Tenaris S.A.

    29 avenue de la Porte-Neuve

    3rd Floor

    L-2227 Luxembourg

    Phone: +352 26 478978

    Fax: +352 26 478979

  • Report this Comment On July 03, 2011, at 4:33 PM, prginww wrote:

    The above comments are exactly why I ceased to subscribe to the "fool" and the Pro Fool! I cancelled my memberships for more professional advice.


  • Report this Comment On July 04, 2011, at 12:40 PM, prginww wrote:

    + Rec. Thanks Dan.

    Good "thinking out of the box". An interesting investment "angle".

    I have a question:

    How high are the barriers against competition entering the OCTG business?

    What would some of those barriers be?

    Is it labor intense? Is technology needed? Etc.

    Sky Pilot

  • Report this Comment On July 04, 2011, at 9:25 PM, prginww wrote:

    This article lacks a fundamental basis for the conclusions drawn. When a major transmission system is built, they use steel pipes. All companies who build interstate transmission systems are regulated, and the government does not allow the other piping systems in mainline networks. The other pipes discussed are used in small retail/distribution lines, so there is no link between companies like KMP and manufacturers of non-steel pipe.

    The capital dollars predicted by INGAA will only be spent if federal regulators start becoming more business friendly. Right now it takes an entire year just to get a permit to install horsepower required to compress natural gas for long distance transmission, and then the filing process is complex and tedious.

    I work for the largest natural gas pipeline company in the U.S., and I don't remember the last time U.S. Steel supplied the pipe on a project. In regard to investing in KMP or some kind of company that supplies good/services to the entire market, the article makes no mention of fundamentals. In the MLP sector, one of the most important things to look at is distributions and the company's return on equity in building out new projects. Efficient allocation and control of capital is tantamount.

    What are the barriers of entry to U.S. Steel or the others? There are other companies that can compete foot for foot on manufacturing this pipe. What are the barriers to entry of KMP's recent pipeline expansions? Billions of dollars in planning and construction is a nice barrier, and long-term fixed price contracts is a barrier.

    Based on fundamentals, I would look at large MLPs or even some of the smaller companies with special competitive advantages. You will receive a nice dividend yield to boot.

  • Report this Comment On July 05, 2011, at 3:46 PM, prginww wrote:

    I should point out MF advised us over 1yr ago to buy Tenaris shares. Then they were under $18, got mine for just over $20. Happy investor thus far!

  • Report this Comment On July 06, 2011, at 7:42 AM, prginww wrote:

    Just by googling Tenaris I could see that the company HQ is in Lux. The board of directors are all Italian, Argentinian, or Mexican. So I guess it is a mix.

  • Report this Comment On July 06, 2011, at 9:03 AM, prginww wrote:

    There are serious questions as to the viability and life of the natural gas wells derived from fracking. They are finding out that they do not respond the same as conventional wells, and actually deplete much faster. You will hear 50 and 100 year drawdowns when in fact the wells can near 90% depletion in 30 years or less. Keep your ears to the ground on this one.....

  • Report this Comment On July 08, 2011, at 1:05 PM, prginww wrote:

    A brief (30 second) visit to the company website reveals that it is in fact based in Luxembourg and incorporated there. It trades on the NYSE and Milan stock exchanges and its articles of incorporation are organized and regulated under Luxembourg laws. I don't know where someone got the idea that it was based in Argentina - it's not. But I never cease to be amazed at how others leap on that falsehood as a reason to impugn the integrity or intelligence of the writer of this article.

  • Report this Comment On July 08, 2011, at 1:10 PM, prginww wrote:

    I loved how everyone jumped on the bandwagon that the writer was wrong about the location of the company. Now, how much can we trust YOUR opinion on anything if you're so quick to rush to judgement....,NOT at all.

    And those judgments about Argentina also reflected a complete lack of knowledge about the country's history and economy.

    I'm sticking with TMF. You guys are all about the bandwagon.

  • Report this Comment On July 08, 2011, at 3:47 PM, prginww wrote:

    Gravity Control can be used to generate power at the lowest cost of any system,,

    Based on the technology of the Flying Saucer.

    These spheres under a Saucer are the Propulsion Units. (PU). A PU can also lift a weight inside a Silo to maximum height. When it is released, it can activate a generator. A Power Station would have

    two Silos, working alternately.

    One PU would be activated by an external source to start the operation.

    The PUs would be LEASED to give investors and taxman their due.

    Look at One Terminal Capacitor for the origin of the invention.

  • Report this Comment On July 08, 2011, at 5:42 PM, prginww wrote:

    With the Obama administration holding up a pipeline to the Gulf, Enbridge (ENB) is proposing one to Canada's west coast.

  • Report this Comment On July 08, 2011, at 5:50 PM, prginww wrote:

    I worked as the VP of Manufacturing for a steel pipe fabricator for several years in the late 80s (yes I'm a dinosaur). Making steel pipe, unless it is in a specialty market segment, is normally a highly competitive and low margin manufacturing business. A review of the financials for TS shows that it has unusually consistent and high gross margins (averaging 43.7% over the last five years), but it's sales have declined 40% over the last three years. This tells me that this is likely a company that knows how to make money in a very tough industry. That said, this company would not reach my top 10 list of manufacturing companies for the simple reason that the barriers to enter are too low. Making steel pipe is a highly automated easy to enter business. Not like making chips, iphones, or computers.

  • Report this Comment On July 08, 2011, at 7:23 PM, prginww wrote:

    Chinese can make pipe cheaply. They can't own much of the US pipeline systems in the ground .Electricity generation will be using more and more gas, instead of 'dirty' coal, thanks to Washington. Go with the pipeline dividend payers, at least until interest rates start to rise. That might be a while.

  • Report this Comment On July 08, 2011, at 9:52 PM, prginww wrote:

    All forms of energy consumptiion will increase, perhaps ten fold in the BRIC countries in just the next 25 years. I would sell my KMP or ETP, but i might sell MEDCO to buy a pipeline munufacturer.

  • Report this Comment On July 09, 2011, at 7:14 AM, prginww wrote:

    I'll stick with the pipelines. X is a mere shadow of its former self. Can't compete with MT. If you have your heart set on a steel company then that is the one I would go with.

  • Report this Comment On July 09, 2011, at 9:07 AM, prginww wrote:

    Investing in Natural Gas holds many caveats. The gas companies had a plan to develop New York state Marcelllus and Utica shale, but they are going to be denied. Strict regulations are headed their way and the new "cheap" energy will be a myth.

  • Report this Comment On July 09, 2011, at 10:49 PM, prginww wrote:

    I'd have more faith in this article if the writer actually knew what OCTG was. Pipelines are not constructed with OCTG which is the tubing, casing and drill pipes used in wells, not pipelines or even line pipe.

  • Report this Comment On July 10, 2011, at 7:26 PM, prginww wrote:

    I recently read that there are some serious problems with natural gas fracking. Both groundwater contamination as well as grossly overestimated reserves. Is there a way to invest in normal natural gas operations separate from those that employ fracking?

  • Report this Comment On July 13, 2011, at 1:01 PM, prginww wrote:

    To Bonefish and ConvexFlow,

    Tenaris has its headquarters in Luxembourg, so the author did not make a mistake.

    Large companies are global now, and their profit centers might be thousands of miles from their HQ

  • Report this Comment On July 14, 2011, at 2:12 AM, prginww wrote:

    TMF really needs an ignore function so people have the option to weed out some of the moronic posters. There's too much crap to wade through to get to any interesting discussion.

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