Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



What’s the Opportunity in Natural Gas Storage?

At Brookfield Asset Management's annual investor day, Sam Pollock, CEO of Brookfield Infrastructure Partners (NYSE: BIP  ) , was asked if his company would be pursing the enticing liquid natural gas export market. Pollock noted that while it's something that has been explored in the past, it's not an area of current focus.

Instead, he said that the current focus in energy would continue to be the opportunities unfolding in natural gas storage. He went on to elaborate by saying that "with the significant reduction in spreads this could be an interesting time to make further acquisitions there and benefit over the long run."

What is this spread?
Natural gas storage operators typically charge a fee based on the spread between gas bought in the summer and sold forward into the winter. For example, a dedicated storage operator like PAA Natural Gas Storage (UNKNOWN: PNG.DL  ) will sign a multi-year, fee-based contract to store gas for a variety of clients. Typically the fee collected is made up of that spread between summer and winter gas prices.

Because these spreads have fallen dramatically over the past couple of years, it's creating opportunities for long-term bulls like Brookfield. How big is the opportunity? According to PAA Natural Gas Storage, that spread has gone from almost a $1.00 per MMBTU to a low of less than $0.40 per MMBTU. While the company expects these spreads to continue to be volatile, the currently compressed spread is reducing the value of natural gas storage assets. For investors that prefer to buy low, it's an opportunity.

Why is this an opportunity?
Challenged spreads and falling asset values are piquing the interest-value investors like Brookfield. The company is interested in scooping up natural gas storage assets at their lows so that it can be positioned to take advantage of the upside during a recovery. Just recently, the company scooped up an interest in natural gas storage assets in Canada, and it's on the hunt for more.

Not only are asset values intriguing, but the low spreads are creating a disincentive to invest in new storage assets. According to PNG, it costs $300 million-$500 million for the first billion cubic feet, or Bcf, of a new greenfield, salt cavern storage development. Not only is new storage capacity cost-prohibitive, but it takes between 24 and 36 months to bring the asset online.

The only cost-effective ways to add storage capacity are either to add another cavern to an adjacent facility or to expand an existing cavern. These two options would have a cost per Bcf of $8 million-$10 million to add a cavern and $3 million-$4 million to expand a cavern. However, not all operators have the capacity that can be expanded, which further limits the options for expansion.

How to invest
Investors interested in a future rebound in storage spreads should look no further than PAA Natural Gas Storage. The company, which was formed by majority owner Plains All American Pipeline (NYSE: PAA  ) is the best pure-play on natural gas storage. The company is spending more than $60 million dollars to expand its storage capacity at very attractive reinvestment rates. Finally, as an MLP, it pays out most of its income to investors; recently it was yielding more than 7.25%.

Another option for investors is Brookfield Infrastructure. The partnership currently controls 300 bcf of natural gas storage capacity which represents 7% of U.S. capacity. The bulk of these assets is part of the Natural Gas Pipeline Company of America, which is 20% owned by Kinder Morgan (NYSE: KMI  ) . Brookfield Infrastructure also pays a very generous distribution to investors; currently, its units are yielding just over 4%.

As the nation's largest midstream operator, Kinder Morgan offers investors four unique ways to invest in its operations. As the largest natural gas pipeline and storage operator in the U.S., it'll benefit from any uptick in storage spreads but not to the same degree as PAA Natural Gas Storage. However, Kinder Morgan offers investors broad-based exposure to the growth of our natural gas industry.

Other midstream MLP's, like Energy Transfer Partners (NYSE: ETP  ) , offer exposure to the natural gas storage marketplace. With 74 Bcf of storage capacity, Energy Transfer has a small but growing storage business. The company does benefit from any increase in storage spreads, which do affect its bottom line. In fact, for every $0.10/MMBtu change in seasonal spreads the company will realize $4.5 million of incremental annual EBITDA for its storage operations.

Foolish bottom line
Few investors even notice natural gas storage; it's not exactly the hot growth business that will lead to big gains. Those investors, like Brookfield, who are taking notice see nothing but opportunity. There are several ways to profit when spreads move higher, with Plains All American Pipeline or its pure-play storage operator PAA Natural Gas Storage among the most interesting opportunities.

There are many other opportunities to profit from our domestic energy boom. The surge in oil and natural gas production from hydraulic fracturing and horizontal drilling is creating massive bottlenecks in takeaway capacity. However, this problem for producers creates a massive and immensely profitable opportunity for midstream companies. Energy Transfer Partners helps alleviate the gluts in supply with 23,500 miles of transformational pipelines. To see if ETP and its industry-leading yield will be a fit for you, click on this detailed premium report, which will supply you with a thorough analysis of this midstream.

Read/Post Comments (1) | Recommend This Article (8)

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 January 23, 2013, at 7:07 PM, BailOut4All wrote:

    The Fool is pumping the Nat Gas storage play pretty hard. Someone is on the pump and dump glide path. Must have accumulated enough options to buy at pretty good prices.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2207597, ~/Articles/ArticleHandler.aspx, 9/27/2016 8:41:46 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 11 hours ago Sponsored by:
DOW 18,094.83 -166.62 -0.91%
S&P 500 2,146.10 -18.59 -0.86%
NASD 5,257.49 -48.26 -0.91%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 4:02 PM
BIP $34.38 Down -0.20 -0.58%
Brookfield Infrast… CAPS Rating: ****
ETP $37.37 Down -0.43 -1.14%
Energy Transfer Pa… CAPS Rating: ***
KMI $21.78 Down -0.16 -0.73%
Kinder Morgan CAPS Rating: *****
PAA $30.06 Up +0.19 +0.64%
Plains All America… CAPS Rating: ****
PNG.DL $0.00 Down +0.00 +0.00%
PAA Natural Gas St… CAPS Rating: *****