Natural gas production has been taking off across North America, requiring new pipelines to move that gas from where it's produced to where it's consumed. A recent study from an industry trade group has concluded that spending on pipelines must double over the next 25 years. Read along, and I'll explain where the money will be spent, why, and how you can profit.
In the past few years, new technologies and cheaper costs allowed producers to access gas trapped in parts of the U.S. previously considered unreachable. As more companies have tapped these unconventional plays, U.S. natural gas production has risen roughly 25% over the past five years, to 78 billion cubic feet per day, or Bcfd for short. Experts expect production to keep rising over the next 25 years, to 113 Bcfd by 2035.
All this new gas needs a lot of new pipelines. According to a new study by the Interstate Natural Gas Association of America (INGAA) Foundation over the past 10 years, companies spent an average of $4.6 billion per year to build 14,600 miles of expansion pipeline. For the U.S. and Canada to maintain efficient, well-functioning natural gas markets, INGAA has concluded that we'll need to spend an average of $8.3 billion per year between now and 2035. That doesn't include the $1.3 billion a year of pipeline infrastructure that oil production will likely need. Combine these two, and at $9.6 billion a year on infrastructure, that's more than a 100% increase in spending for the next 25 years.
INGAA projects that we'll need 43 Bcfd of expansion mainline capacity from 2010 to 2035. Besides major regional lines, smaller pipeline laterals will need to connect new power plants, storage fields, and processing facilities to the natural gas transmission network, with expected investments of $5.7 billion per year. New gathering system pipelines will also be required to connect new producing wells to processing facilities and pipelines, with an expected investment of $2.6 billion per year.
Remember the Gold Rush
Now, some would have you think that you can best play this opportunity by investing in major pipeline operators Kinder Morgan Partners
Put that in your pipe
There are many pipe makers to choose from, but a few stand out.
That said, I'm most interested in Tenaris
Tenaris is not particularly cheap. Its $1.2 billion in earnings over the past 12 months give it a P/E ratio of 22, in line with peer OAO TMK. (U.S. Steel was not profitable this past year.) However, Tenaris' direct exposure to the OCTG business should allow its investors to best cash in on the pipeline boom.
Foolish bottom line
Natural gas is changing the face of energy in North America. By investing in the suppliers to the boom, investors will best position themselves to profit without taking huge risks. If you're still looking for more ideas, check out The Motley Fool's free report "The Only Energy Stock You'll Ever Need." In it, Fool analysts detail a company that will also benefit from the pipeline boom. Click here to grab a copy.
Fool contributor Dan Dzombak holds no position in any company mentioned. 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.