The United States is becoming a net exporter of energy, a situation that was nothing more than a fantasy just a few years ago. As illustrated below, propane and propylene exports climbed significantly in the past three years. This is all well and good, but how do you make a buck off of this export activity? Below are three companies that are engaged in the export of various energy products that are worth a look.
First, some definitions
Natural gas liquids (NGLs) are hydrocarbons like propane or butane that are found mixed in with natural gas. NGLs are actually more valuable than natural gas in today's market. Liquefied petroleum gas (LPG) refers to many of these same gases like propane and butane, but in liquefied form. NGLs in their liquid form facilitates exports. Refined petroleum products typically refers to gasoline or diesel fuel made from crude oil, but propane and other NGLs can also be made from refining crude.
Refiners with midstream operations
In some respects, Phillips 66 (NYSE: PSX ) and Valero Energy (NYSE: VLO ) work on the same plantation. That is, both are refiners with significant midstream assets. Both companies leverage the relatively low price of North American-produced energy to make money from exports of LPG and refined products. Both companies plan on expanding their export activities. To optimize profitability, both companies are aggressively expanding their midstream operations (pipelines and rail car facilities, for example) in order to bring more inexpensive North American crude to their refineries.
Two recent earnings announcements from Phillips illustrate the importance of exports to its business. Phillips' export operations are part of its midstream operations. This business segment reported quarterly earnings growth from $122 million in the fourth quarter of 2013 to $188 million in the first quarter of 2014. During this time, the company reported record exports. It's little wonder that Phillips decided to expand its LPG terminal in Texas.
Valero exports of gasoline and diesel slowly increased over the past three years. Recognizing a business opportunity in diesel exports to Europe and gasoline exports to Latin America, Valero plans on more than doubling its export capacity of these refined products. One interesting opportunity for Valero is the conversion of methane into methanol. According to its latest investor presentation, there is significant demand worldwide for methanol. With the low price of U.S. natural gas, Valero could profitably convert the methane component into methanol and sell it domestically or overseas. A final decision on this project should come by the end of 2014.
Midstream MLP with export plans
As one of the biggest independent midstream master limited partnerships, Enterprise Products Partners (NYSE: EPD ) is frequently exemplified as a great investment. Lately, the company took some heat for its slowing distribution growth and high level of retained earnings. Enterprise's management responded by pointing out that it is holding onto cash, in part to fund expansion projects internally and avoid interest expenses. With interest rates at historical lows and with only one direction to go, this sounds like a prudent strategy to me.
What expansion projects are in the winds? Exports of refined products and LPG. Earlier this year, Enterprise began exporting refined products from its Beaumont, TX, facility, with plans to increase not only its export capacity but its diversity of products as well. Ethane exports should also commence in the third quarter of 2016. Additionally, Enterprise makes the octane enhancer MBTE for export.
Any recent negative press didn't do squat to the company's stock price. Enterprise's stock climbed 27% over the past year, with distributions growing each quarter. Admittedly, the $0.01 per share distribution increase each quarter wasn't stunning, but if Enterprise's export activities grow then the distribution should grow faster. The distribution coverage ratio is at a high 1.36, but it means that Enterprise has cash on hand to build its business.
Final Foolish thoughts
All three of these companies exploit one common fact: energy prices in the U.S. are low enough to make exports profitable, so export they do. In some ways, the refiners must. U.S. gasoline consumption has been slowly declining over the years, and with all that domestic crude oil production there is downward pressure on gasoline prices and profit margins. Overseas markets for gasoline and other products pay better, so exports help keep the profits rising.
Of these three companies, I'm partial to Phillips 66. It has a diverse business with plans to grow not only its exports but its high-margin petrochemical products as well. The company's dividend has grown nicely, as has its stock. I think that Phillips has the most combined income and capital gains growth potential.
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