U.S. natural gas production continues to boom. The problem is that U.S. natural gas consumption growth lags production growth. Instead of betting directly on natural gas prices and waiting for the supply/demand equation to slowly balance out, there is a second option. You can invest in natural gas infrastructure, allowing you to profit from natural gas' growth without worrying too much about prices.
US Natural Gas Marketed Production data by YCharts
Look south
U.S. natural gas consumption is rising, but the chart shows how production is still high when compared to the supply/demand situation before 2006. One of the easiest ways to rectify the supply/demand imbalance is to increase exports.
Liquefied natural gas exports are challenging because of the big costs to cool natural gas. By building pipelines to Mexico and LNG export facilities, midstream companies are able to increase U.S. natural gas exports and remain diversified. Energy Transfer Partners (ETP) is pursuing this path. The Federal Energy Regulatory Commission recently gave it permission to build a pipeline from Texas to Mexico with a capacity of 140 million cubic feet per day (mmcfpd).
This company's assets are focused on the Gulf Coast, making it a natural candidate to provide the pipeline hookups for LNG export facilities. Energy Transfer Partners' Lake Charles, La. LNG liquefaction project is already under development, with FERC construction approval expected by mid-2015.
Energy Transfer Partners is not the only company working with Mexico. Kinder Morgan Energy Partners LP (NYSE: KMP) has been working on its Sierrita Lateral project for some time. The $200 million pipeline has a capacity of 200 mmcfpd and is expected to come online toward the end of 2014. A FERC permit is still needed; but given FERC's history of approving natural gas export pipelines, Kinder Morgan has little to worry about.
Kinder Morgan Energy Partners or its LLC version, Kinder Morgan Management (NYSE: KMR), are solid ways to profit indirectly from the natural gas boom. In 2014 natural gas pipelines are expected to provide 43% of their cash flow. With an existing network of product pipelines and natural gas pipelines along the U.S.-Mexico border and the Gulf Coast, Kinder Morgan is perfectly situated to support the U.S. energy export boom.
Don't forget natural gas liquids
Thanks to the fracking boom, natural gas liquids production has also grown very quickly. Enterprise Products Partners (EPD 1.69%) has a big network of NGL pipelines with established export connections. Its Rio Grande pipeline transports mixed NGLs to Mexico.
Enterprise Products Partners' Aegis pipeline is another good growth play. Its first stage is expected to be in service by the third quarter of 2014, transporting up to 425,000 barrels per day (mbpd) of ethane. By bringing ethane to the Gulf Coast, Enterprise Products Partners is helping to produce more U.S. petrochemical exports.
The financial perspective
All of these midstream plays are in a good position to profit from the booming natural gas market, but they are not equal. Enterprise Products Partners' 2013 distribution coverage ratio of 1.55 is higher than Kinder Morgan's ratio of 1.09 or Energy Transfer Partners' ratio of 1.05.
Energy Transfer Partners has a significant retail arm that is a drag on growth. Among all segments retail had one of the company's biggest year-over-year falls in 2013 adjusted earnings before interest, taxes, depreciation, and amortization. Kinder Morgan and Enterprise Products Partners are purer midstream plays without significant retail exposure.
Given the low growth possibilities in the retail world, it should be no surprise that Energy Transfer Partners' current year-over-year distribution growth rate of 2.9% is below Kinder Morgan's comparable growth rate of 5.4% and Enterprise Products Partners' growth rate of approximately 6.1%.
Bottom line
There are many ways to invest in natural gas. By investing in midstream companies with healthy pipeline networks close to the Mexican border and the Gulf Coast, you can get a great piece of growing American industry. Kinder Morgan's FERC approval for the Sierrita Lateral should come soon, and Enterprise Products Partners is already exporting NGLs south of the border.
Energy Transfer Partners comes in second place. Its retail operations compress growth, and it already has the lowest distribution coverage ratio and growth rate of these three companies.
