America's shale boom has resulted in record oil and gas production in recent years. An additional benefit has been the boom in NGLs (natural gas liquids) such as ethane, propane, butane and pentane. These chemicals can be used as fuels but are more valuable as petrochemical feedstocks for things such as plastics. Recently, growth in gas production (and NGLs) has been so prolific that a lack of infrastructure for storage and transportation has resulted in a massive glut of NGLs such as ethane. The price has dropped so low that producers have been forced to "reject' it, meaning allowing it to remain within natural gas (as opposed to refined out and sold as a valuable chemical feedstock).
Ethane rejection was about 200,000 bpd (barrels/day) in 2013 and is projected to grow to 450,000 bpd in 2014. This represents immense wasted opportunity because global demand for ethane is high, especially in Europe. The midstream MLP industry is stepping up to fill the need for infrastructure with over $70 billion in investments in petrochemical complexes along the Gulf of Mexico. This article highlights four high-quality MLPs that are preparing to cash in on the rich opportunities awarded by America's continuing energy revolution.
MarkWest Energy Partners (NYSE: MWE ) is one of the largest midstream providers of processing, storage and gas transportation in the prolific Marcellus and Utica Shale areas of New York, Pennsylvania, Ohio, and West Virginia. It has 1.6 Bcf/d (billion cubic feet/day) of natural gas processing capacity (20% of 2013 Marcellus production) and is investing $1.6 billion in 2014 on a 16 facility investment program (nine processing plants with 1.92 Bcf/d capacity and seven de-ethanator/fractionators).
The partnership is partnering with Sunoco on two ethane pipelines. These are the Mariner West (50,000 bpd capacity running to Ontario) and the Mariner East (70,000 bpd running to Philadelphia export terminals).
A further joint venture is with Kinder Morgan and Targa Resources on a repurposing of Kinder's Tennessee pipeline system. A 1,000 mile pipeline will transport NGLs from the Marcellus shale to the Gulf for export and petrochemical production. The initial capacity will be 150,000 bpd but expandable to 400,000 bpd.
Due to its large investments in Marcellus and NGL transportation infrastructure, management is guiding for 27%-43% distributable cash flow (DCF) growth in 2014. Combine this with analysts estimates of 60% EPS growth over the next decade and the already generous yield of 5.3% is likely to grow strongly for years to come.
Kinder Morgan Energy Partners (NYSE: KMP ) is the fourth largest energy company in America with 68,000 miles of pipelines serving every major oil/gas shale formation, including the hyper-prolific Marcellus shale (production projected to increase 20-fold between 2007 and 2017-2018). The investment thesis for Kinder Morgan goes far beyond the joint venture with MarkWest and Targa.
According to the latest investor presentation, Kinder's project backlog, which increased by 16% in the last quarter (to $16.4 billion), doesn't include investments in the Marcellus shale. Given the historic opportunities presented by this shale formation, this likely means that the company's project backlog will expand drastically over the next three to four years as Marcellus production continues to boom and demand for infrastructure reaches a fever pitch.
Kinder Morgan Inc (NYSE: KMI ) is the parent company and general partner of Kinder Morgan Energy Partners. The investment thesis here is that as the MLP pursues aggressive expansion into NGL transport and the Marcellus shale, the parent company will benefit from both increased IDR (incentive distribution fees) and distributions. This will drive dividend growth (KMI is a corporation not an MLP) superior to KMP's 5%-6%. Management is guiding for 8% growth yet just raised its dividend by 11% after announcing record quarterly earnings. With a track record of beating distribution/dividend guidance (13 out of the last 14 years) and a 5% yield, this stock represents one of the best dividend growth opportunities in America.
Enterprise Product Partners (NYSE: EPD ) is the second largest midstream MLP in America and a major player in NGL transport and exports. With the partnership projecting ethane demand to increase by 600,000-750,000 bpd by 2020 and major export opportunities to western Europe and Asia, management is investing into two major NGL pipelines.
The first is the ATEX pipeline, which runs 1,230 miles from the Marcellus shale to the Gulf Coast. Its starting capacity is 125,000 bpd but is expandable to 265,000 bpd. It came online in January 2014 but two NGL fractionators (which refine out NGLs) are coming online by Q3 2014. The pipeline has 15-year contracts in place.
The second project is the 425,000 bpd Aegis ethane pipeline, which runs 270 miles from Texas to Louisiana where it will supply six petrochemical plants. This pipeline will be complete in Q2 2015 but is already contracted for over 200,000 bpd.
The coming NGL export boom stands to make billions in long-term, steady cash flows for the above MLPs. Income investors can participate in the coming prosperity through investments in these partnerships. With generous yields and strong distribution growth prospects these investments maximize the likelihood of long-term market outperformance.
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