3 Ways to Profit From This $176 Billion Energy Megatrend

Production of natural gas liquids, a little-known byproduct of the fracking boom, is creating a $176 billion investment opportunity that can make long-term income investors rich. This article highlights two MLPs and a general partner that are making all the right moves to cash in on the coming bonanza.

May 31, 2014 at 10:40AM

Many investors are aware of America's energy Renaissance. Through new technology such as hydraulic fracking, horizontal drilling, and enhanced oil recovery, shale gas and oil are being produced at abundant and growing rates, resulting in a rich bounty for both companies and investors. However, there is another side boom, a direct result of increased gas production, that many may not know about. A boom in natural gas liquids (NGLs), such as ethane, propane, and butane, is occurring as well, and these chemicals are in hot demand overseas (for fuel) and domestically in the form of petrochemical feedstocks for the creation of everything from pharmaceuticals to plastics.

The shale gas and NGL boom has been so prolific that it has caught many companies unprepared to fully benefit from it. For example, in North Dakota, in the Bakken shale formation, 30%-35% of the natural gas must be burned off and wasted due to a lack of infrastructure. 

Similarly, the glut of ethane, paired with a lack of infrastructure for storing, processing, and transporting it, has resulted in massive "rejection," meaning the valuable chemical is allowed to remain mixed with natural gas and burned as fuel, rather than used to its maximal economic potential. With ethane prices now 75% below that of its oil based alternative, naptha, the petrochemical industry has taken notice and is planning on investing $125 billion in constructing or updating 148 chemical plants to take advantage of this cheap ethane (and other NGLs) In addition $56 billion will be necessary to invest in midstream NGL infrastructure.

Enterprise Products Partners (NYSE:EPD) foresees a 79% increase in demand for NGL exports by 2020 resulting in a 600,000 bpd-750,000 bpd increase in ethane transportation requirements. As part of its $5 billion in investments coming online in 2014, the MLP is working on two NGL pipelines. 

The first is the ATEX pipeline, which runs 1,230 miles from the prolific Marcellus shale, America's largest shale gas formation,to the Gulf Coast, where the majority of petrochemical plants and NGL export terminals are located. This pipeline will initially transport 125,000 bpd of NGLs, but is expandable up to 265,000 bpd. It came online January 2014, but two fractionators (for extracting NGLs from natural gas) won't be online until Q3 2014.

The second pipeline, the Aegis, coming fully online in Q2 2015, is a massive 425,000 bpd ethane transporter, running from Texas shale fields to six petrochemical plants on the Gulf Coast. This pipeline is already contracted for 200,000 bpd, and the ATEX pipeline has secured 15-year contracts for its capacity. 

The other two companies I want to talk about are ONEOK Partners (NYSE:OKS) and its general partner (gp) ONEOK Inc (NYSE:OKE). These represent not only a great play on the ongoing NGL boom but also great income growth opportunities. This is because the company has been facing recent challenges due to the low cost of NGLs and high rates of ethane rejection. This resulted in weak first quarter results, with net income down 35%, operating income down 30%, and adjusted EBITDA down 24%. 

These results resulted in an 8% price decline that I feel is a buying opportunity. Why? For the same reasons that management continues to increase the distribution, which is up 4.2% year over year.  The company has issued 2013-2016 guidance of:

  • 15%-20% EBITDA growth;
  • 6%-8% average distribution growth for ONEOK Partners;
  • 10% average dividend growth rate in 2015-2016 for ONEOK Inc (after a 53% dividend increase in 2014);
  • Long-term distribution coverage ratio of 1.05-1.15;
  • Investment projects earning 14%-20% internal rates of return.
What could possibly have management so bullish despite the recent weakness? The answer is simple: the company and partnership is undertaking massive investments to take advantage of America's natural gas and NGL boom. Management is now working on $6 billion-$6.4 billion in investments, split evenly between natural gas, such as North Dakota's gas burn-off problem, and NGL.In addition, there are $3 billion-$4 billion in additional, yet unannounced backlog projects the company is considering. 
With a potential $10 billion in new infrastructure projects coming up, backed by megatrends in natural gas and NGLs, its not hard to see why analysts at S&P IQ are projecting a 13.43% distribution growth rate for ONEOK Partners over the next decade. 
And with every $0.01 in additional distributions from its MLP resulting in $12.5 million in marginal revenue for its gp, 
it's easy to understand why those same analysts are predicting that the general partner's EPS growth will be 22% CAGR over the next decade, with dividends growing at 18%.
With a current yield of 5.4% for ONEOK Partners and 3.5% for ONEOK, and such strong distribution/dividend growth potential, long-term income investors are likely to do very well owning either -- or both.

Foolish takeaway
America's natural gas and NGL boom go hand-in-hand, with both offering long-term income investors amazing opportunities for high and growing yields and capital gains. Enterprise Products Partners, ONEOK Partners, and its general partner ONEOK Inc are three exceptional choices for patient investors to cash in on these important long-term energy megatrends. 

Adam Galas has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners, Oneok, and Oneok Partners. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers