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.
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.