The U.S. and Canada are sitting on a treasure trove of oil and gas resources. Because of that, and the anticipation that global demand will continue rising, companies expect to invest billions of dollars each year to tap into those resources.
However, in addition to the spending on services and equipment, the industry will also need to invest in building new midstream infrastructure to transport, process, store, and export this growing stream of hydrocarbons. It's a nearly $800 billion opportunity over the next 18 years alone, according to a recent report by the Interstate Natural Gas Association of America Foundation. At $44 billion per year, the estimated annual spending level is 70% higher than it projected two years ago. That bodes well for pipeline stocks, which appear poised for significant growth as they build the midstream infrastructure necessary to meet North America's needs.
The natural gas opportunity
More than half of the forecast investment will be on new natural gas infrastructure, according to the report. It estimates that the industry will need to spend $417 billion, or an average of $23 billion per year, through 2035 to meet the industry's needs. That's an increase from the roughly $333 billion market opportunity foreseen in 2016's report. These investments will range from new gathering and transmission pipelines, processing plants, storage capacity, and liquefied natural gas (LNG) export facilities.
The industry has already identified and captured several of these opportunities in the past few months. Natural gas pipeline giant Kinder Morgan (NYSE:KMI), for example, has sanctioned two long-haul natural gas pipelines out of the Permian Basin in the past year (the Gulf Coast Express and the Permian Highway Pipeline). Those projects are part of the more than $4 billion Kinder Morgan expects to invest in new natural gas infrastructure in the coming years. What's important to note about these investments is that Kinder Morgan expects them to generate lucrative returns, with the company anticipating that they'll add roughly $800 million in incremental annual EBITDA to its bottom line, which is a nice bump from the $7.5 billion in adjusted EBITDA it expects to produce this year.
Meanwhile, natural gas gathering and processing-focused infrastructure companies Antero Midstream (NYSE:AM) and EQT Midstream (NYSE:EQM) are planning to spend big to expand their footprints in the Marcellus and Utica shale regions. Antero Midstream expects to invest at least $2.7 billion over the next five years to support the growth of its gas-producing parent, which should fuel 28% to 30% annual increases in its distribution to investors through 2020 and 20% yearly growth in 2021 and 2022. In the meantime, EQT Midstream has a $4.8 billion project backlog, which should fuel 15% annual growth in its payout in the coming years.
The liquids opportunity
The report also sees a large opportunity for investment in new oil and natural gas liquids (NGLs) infrastructure. It forecasts that the industry will need to invest $321 billion in building new oil pipelines, storage tanks, and related infrastructure over the next 18 years, which is well above the $137 billion to $190 billion spending forecast from 2016. Meanwhile, the latest report also sees a $53 billion investment for NGL-related infrastructure over the next 18 years.
One of the biggest near-term opportunities has been in the Permian Basin where pipeline companies are building infrastructure as fast as they can. Plains All American Pipelines (NYSE:PAA) currently has $2.6 billion of oil-related infrastructure under construction, including two much-needed oil pipelines out of the Permian. Those projects position the company to grow its earnings at a double-digit annual pace through 2019. In addition to that, the company has other growth opportunities in the works, including a proposed oil pipeline in the Permian via a partnership with ExxonMobil.
Meanwhile, Targa Resources (NYSE:TRGP) has been targeting investment opportunities focused on natural gas and NGLs and currently has more than $2 billion in projects under way. The company is one of the partners on Kinder Morgan's Gulf Coast Express pipeline as well as on the proposed Whistler project that would also move gas out of the Basin. In addition to that, Targa is building the Grand Prix Pipeline, which will transport NGLs out of both the Permian and STACK shale play. These projects have the potential to nearly double Targa's earnings by 2021.
High-octane growth ahead
North America is in the midst of an energy infrastructure building boom, which appears poised to last for at least the next 18 years. Because of that, pipeline companies are on pace to deliver significant cash flow growth in the future, which should give them the fuel to pay even higher dividends. That combination of growth and income could enable the sector to significantly outperform the market from here.