Natural Gas Liquids Companies Could Steal the Show in 2014

Natural gas liquids production is on the rise, and with more output comes more cash flow

Jan 2, 2014 at 11:40AM

In America, everyone talks about rising natural gas or crude oil production, casting natural gas liquids, or NGLs, off to the side. But why, when NGLs (ethane, butane, propane, isobutene, and pentane) have so many great things going on in the industry right now?

While most analysts in the energy sector are well aware of the rise in NGL production, it seems to not receive the attention it deserves. Well, I will try to push some of the limelight toward the subject.

The other frac
Hydraulic fracking is used to unlock oil and gas hidden in shale formations, and fractionation is used to process the NGLs that come out. Targa Resources Partners (NYSE:NGLS) is one of many operators of fractionators and recently expanded its capacity.

In Targa Resources' latest quarter, it increased the fractionation capacity of its Cedar Bayou facility by 100,000 Bbl/d while expanding the export capacity of its Galena Park Marine Terminal by 2 million barrels per month. This helped Targa Resources Partners grow its EBITDA to a record in the third quarter, which was 34% higher than last year.

To keep servicing America's growing NGL output, Targa Resources formed a joint venture with Kinder Morgan Energy Partners (NYSE:KMP) to construct a new fractionation facility at Mont Belvieu, Texas. The purpose of the new facility will be to service the additional NGL coming down from the Utica and Marcellus shale via the Utica Marcellus Texas Pipeline.

The Utica Marcellus Texas Pipeline is being constructed by another joint venture, but this time between Kinder Morgan Energy Partners and MarkWest Energy Partners (NYSE:MWE). In order for NGL producers to want to use the new pipeline, they need to know someone at the end of the line will be able to buy and process their product. Kinder Morgan Energy Partners is nice enough to offer both the logistics and the processing capacity to allow America's energy boom to happen. 

In-Targa-ble part of the economy
Targa Resources Partners is an important part of our economy, and its efforts will be greatly rewarded. Management expects EBITDA to grow by ~25% in 2014, with part of that growth going toward a 7-9% increase in Targa Resource's distribution.

The other two midstream companies are also set to reap the spoils, with Kinder Morgan Energy Partners guiding for a 4.7% increase in its payout next year. For MarkWest Energy Partners, it's expecting a sharp increase in distributable cash flow next year that will allow it to pay out more to its unit holders.

By increasing NGL transportation and processing capacity, these three midstream MLP's are able to capitalize on the wave of additional NGL output coming online. While Targa Resources has already expanded the fractionation capacity of its Cedar Bayou facility, it plans on continuing to do so in the future. To grow cash flow further, Targa Resources Partners plans on constructing Train 5 at the Cedar Bayou.

Once Targa Resources processes America's NGLs, it needs to be able to find an end consumer. By expanding its export capacity, Targa Resources Partners will be able to export 5 million barrels a month by Q3 2014, up from 3 million barrels a month currently.

This expansion is beneficial for the industry, and America as a whole. Kinder Morgan will also be able to utilize Targa's export capacity and the ability to export to foreign markets drives up demand for NGLs. Higher levels of demand prompts more investment into growing production, which drives up output. If America produces more NGLs, Targa Resources Partners, MarkWest Energy Partners and Kinder Morgan Energy Partners will rake in more cash.

Foolish conclusion
Oil and dry gas production is skyrocketing in America, but we can't forget rising NGLs production as well. As midstream companies expand America's export capacity, new streams of cash flow pop up all over the place. More pipelines are needed to move the additional output, more fractionators are needed to process the additional output, and export terminals are needed to transport the final product to foreign consumers.

With all this going on, these three companies are leading the way: Tagra Resources, Kinder Morgan, and MarkWest. Through acquisitions and organic growth projects centered around NGL, these companies will continue to see strong double digit earnings growth.

Natural gas liquids are just one part of our American energy boom

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Callum Turcan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks 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.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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