2 MLPs Set to Cash in on 4 Important Energy Trends

America's natural gas boom is creating profitable optionalities that can make investors rich if they recognize them and invest accordingly. Marcellus shale, gas exports to Mexico, and exports of LNG and ethane are important growing energy trends, and this article points out two MLPs ready to cash in on the coming bonanza.

May 13, 2014 at 12:01PM

Editor's note: A previous version of this article stated that the EPNG pipeline would be acquired by El Paso Pipeline Partners through a drop down acquisition, when in fact there are no plans for such an acquisition. The Fool regrets the error.

A core Foolish principle is to invest in quality companies with excellent management and a clear growth thesis. This article is designed to point out several energy trends that income investors may not have heard about and two MLPs that can help them profit handsomely, both in terms of income and capital gains.

Marcellus shale and ethane exports
The Marcellus shale is America's largest gas field, estimated to contain as much as 410 Tcf (trillion cubic feet) of recoverable natural gas -- 15 years worth of American production.Its predicted lifespan is the longest of any shale formation at 110 years. 

The Marcellus has proven a prolific gas producer, with daily production increasing 14-fold in just the last seven years (1 Bcf/day in 2007 to 14 Bcf/day in 2014). Production is predicted to continue growing, potentially hitting 20 Bcf/day by 2017-2018.

Part of natural gas production is natural gas liquids (ethane, propane, butane), and right now there is a major glut of ethane resulting in rock-bottom prices due to lack of transportation and storage infrastructure. This is causing many producers to "reject" ethane. Rejection means shipping the ethane as part of natural gas rather than refine it out into a separate compound, which is valuable as a petrochemical. Enterprise Products Partners estimates that NGL production will increase by 79% through 2020, a response to a doubling  of LNG export demand (largely from Europe).

The reason ethane requires its own pipelines is because it burns hotter than regular natural gas (methane). The lack of dedicated pipelines is why producers have had to reject ethane (and sell it as part of natural gas fuel instead of a more valuable petrochemical). In 2013 200,000 bpd were rejected. In 2014 that number is predicted to climb to 450,000 bpd. This waste represents a major growth opportunity for certain MLPs.

Mark West Energy Partners (NYSE:MWE) is one of the largest MLPs active in the Marcellus shale, with 1.6 Bcf/day of processing capacity (20% of Marcellus production in 2013).

The company is investing $1.6 billion in 2014 as part of a 16-facility Marcellus buildout. This includes nine processor plants with 1.92 Bcf/day capacity and seven de-ethanator/fractionator plants.

In addition to massive expansion designed to cash in on the world's fastest growing gas field, Mark West is investing heavily into ethane exports. It has two joint ventures with Sunoco: the Mariner East and Mariner West ethane pipelines. 

The Mariner West pipeline will initially transport 20,000 bpd to Ontario, but then ramp up to 50,000 bpd. Mariner East will transport 70,000 bpd to Philadelphia, where it can be exported.

Due to its massive investment in the prolific Marcellus shale and ethane pipelines, management is guiding for a 27%-43% increase in distributable cash flow/unit in 2014. This should allow for very strong distribution growth. 

With such massive growth ahead of it (analysts are predicting 60% EPS growth over the next decade), income investors can enjoy strong capital gains, and a very safe 5.3% distribution with a history of fast growth (9.92% CAGR over the last 11 years) that is likely to continue. 

LNG and gas exports to Mexico
El Paso Pipeline Partners (NYSE:EPB) is part of the Kinder Morgan empire and has recently faced a brutal price decline due to weak 2014 distribution guidance (2% distribution growth and then no growth for five quarters). This despite major drop downs from its parent company Kinder Morgan Inc.

The difficulties El Paso is having stem from weaker prices on contract renewals in its rocky mountain pipelines. The drop downs it will receive in 2014 will guarantee the security of its current yield but future distribution growth will require growth catalysts. Luckily El Paso has two. 

The first is gas exports to Mexico, which according to the Energy Information Administration (EIA) have been growing at 12.5% CAGR.

The second major growth opportunity for El Paso is its SNLG terminal on Elba Island near Savannah, Georgia. This terminal (1.8 Bcf/d export capacity), along with the Elba Express pipeline (connects terminal to rest of southern pipeline network) are 100% owned by El Paso and is fully contracted for 21 years (Elba Express for 29 years). The SNLG terminal will come online in 2016 and reach maximum capacity by 2018. 

With the Marcellus shale production growth exceeding all expectations, LNG exports are likely to be a major energy megatrend in the coming decades. Kinder Morgan is expecting to further expand its LNG export capabilities and El Paso Pipeline (and its investors) are likely to benefit immensely. 

Foolish takeaway
Markwest and El Paso Pipeline Partners represent excellent plays on major energy trends that are likely to continue for decades to come. Patient, long-term investors now have a chance to lock in great yields (with good distribution growth prospects) and the potential for serious capital gains. 

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


Adam Galas has no position in any stocks mentioned. The Motley Fool recommends El Paso Pipeline Partners LP. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers