In 2008 America's daily oil production was 5 million barrels/day (bpd). In the first quarter of 2014 that number hit 11 million bpd, which is a 120% increase in just six years.
Meanwhile gas formations such as the Marcellus and Utica shales are fueling record gas growth. For example, from 2007 through 2035 the Marcellus/Utica shale is expected to increase production 34-fold, and the Marcellus alone is expected to be producing more gas than Quatar, the world's third largest gas producer, by September.
With the Marcellus and Utica shales estimated to hold as much as 480 trillion cubic feet of gas and the Permian Basin estimated to hold 75 billion barrels of recoverable crude, it's easy to see why investors might be getting excited.
However, many investors may be unaware of the sheer magnitude of North America's oil reserves:
- Canada's tar sands are estimated to hold a total of 2.5 trillion barrels of oil, though only 170 billion barrels are currently recoverable
- Total shale oil reserves are estimated at 3.1 trillion barrels, 58 billion currently recoverable
- Total US Shale Gas reserves are 20,450 trillion cubic feet
To put North America's 5.6 trillion barrels of total oil reserves in perspective, it's estimated that all the oil ever produced totals just 1.1 trillion barrels.
Obviously not all of this oil will be produced, due to technological limitations, environmental concerns, and economic feasibility. However, the opportunity for long-term profit is staggering, and this article points out three investments poised to benefit from one of the largest energy booms in history.
Pembina Pipeline Corporation
) is a $14 billion Canadian midstream company that has been experiencing strong growth in both cash flows and operating margins over the last decade. For example, since 2004 Pembina Pipeline has grown adjusted cash flows/share by 10% annually, 15% annually since 2011. Meanwhile operating margins have been growing by 21% annually over the last 10 years.
In 2012, Pembina paid $3.1 billion in stock to buy NGL (natural gas liquids) extractor Provident.
Since then Pembina Pipeline has been hard at work integrating and expanding its growing base of assets and projects. Since 2011 Pembina has grown its project backlog from $4.5 billion to $7.3 billion and has secured $3.5 billion in new commitments. This impressive growth has occurred while Pembina strengthened its balance sheet, reducing debt/EBITDA (earnings before interest, taxes, depreciation, and amortization) from 3.75 to 2.8, and lowered its payout ratio from 88% to 68%.
Pembina is hoping to double its operating margins by 2016 and Pembina's last quarterly earnings revealed the company is well on its way to this goal. For example, crude oil, gas service, and overall midstream operating margins were up 21%, 53%, and 63% respectively. Combined with oil volumes up 12% and gas volumes up 77%, Pembina was able to grow its adjusted EBITDA by 50% compared to Q1 2013.
Source: July 2014 investor presentation
) is the general partner of Enbridge Energy Partners
) and owns 34% of the MLP. Recently, to help Enbridge Energy Partners with its aggressive growth plans, Enbridge Inc restructured its incentive distribution rights (IDRs), accepting 66.1 million class D units, which pay the same as limited units. In exchange, Enbridge Inc waived its current incentive distribution rights, which gave 50% of Enbridge Energy Partners' marginal distributable cash flow (DCF) to Enbridge The new agreement calls for a maximum of 25% IDR cap going forward and is a great help to Enbridge Energy Partners in its aggressive growth plans.
Enbridge Energy Partners transports 65% of all Canadian oil exports to the US and has megagrowth ambitions with a total of $11.5 billion in organic growth projects under way. The scope of Enbridge Energy Partners' growth plans required Enbridge Inc to restructure its IDRs, which reduced its cost of capital. Enbridge Inc also dropped down its natural gas/NGL assets in the form of Midcoast Energy Partners.
This recent drop down of a 12.6% stake in Midcoast Energy left Enbridge Energy Partners with $350 million in additional cash, 48% of Midcoast's units and its IDRs. Enbridge Energy believes that MidCoast Energy Partners can grow revenues by 12%-19% annually through 2017 through a combination of future drop downs, organic investment, and small increases in oil and gas prices. This strong growth is why analysts are expecting Midcoast Energy Partners to grow its distribution by 11.42% annually through 2023.
Such strong distribution growth would mean substantial cash flows to Enbridge Energy Partners, whose management believes it can achieve 5% distribution growth through 2017.
Analysts are expecting distribution growth of 27% annually over the next decade, but even 5% distribution growth, when combined with Enbridge Energy Partners' 6.4% yield should provide total returns of around 11.4%. This would handily beat the stock market's 1873-2013 compound annual growth rate of 9.2%.
Canada's oil and gas riches offer immense long-term opportunity for strong income growth and capital gains. Pembina Pipeline, Enbridge Energy Partners, and Enbridge Inc are three strong choices for market-beating total returns for many years to come.
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