At Brookfield Asset Management's annual investor day, Sam Pollock, CEO of Brookfield Infrastructure Partners (NYSE:BIP), was asked if his company would be pursing the enticing liquid natural gas export market. Pollock noted that while it's something that has been explored in the past, it's not an area of current focus.
Instead, he said that the current focus in energy would continue to be the opportunities unfolding in natural gas storage. He went on to elaborate by saying that "with the significant reduction in spreads this could be an interesting time to make further acquisitions there and benefit over the long run."
What is this spread?
Natural gas storage operators typically charge a fee based on the spread between gas bought in the summer and sold forward into the winter. For example, a dedicated storage operator like PAA Natural Gas Storage (UNKNOWN:PNG.DL) will sign a multi-year, fee-based contract to store gas for a variety of clients. Typically the fee collected is made up of that spread between summer and winter gas prices.
Because these spreads have fallen dramatically over the past couple of years, it's creating opportunities for long-term bulls like Brookfield. How big is the opportunity? According to PAA Natural Gas Storage, that spread has gone from almost a $1.00 per MMBTU to a low of less than $0.40 per MMBTU. While the company expects these spreads to continue to be volatile, the currently compressed spread is reducing the value of natural gas storage assets. For investors that prefer to buy low, it's an opportunity.
Why is this an opportunity?
Challenged spreads and falling asset values are piquing the interest-value investors like Brookfield. The company is interested in scooping up natural gas storage assets at their lows so that it can be positioned to take advantage of the upside during a recovery. Just recently, the company scooped up an interest in natural gas storage assets in Canada, and it's on the hunt for more.
Not only are asset values intriguing, but the low spreads are creating a disincentive to invest in new storage assets. According to PNG, it costs $300 million-$500 million for the first billion cubic feet, or Bcf, of a new greenfield, salt cavern storage development. Not only is new storage capacity cost-prohibitive, but it takes between 24 and 36 months to bring the asset online.
The only cost-effective ways to add storage capacity are either to add another cavern to an adjacent facility or to expand an existing cavern. These two options would have a cost per Bcf of $8 million-$10 million to add a cavern and $3 million-$4 million to expand a cavern. However, not all operators have the capacity that can be expanded, which further limits the options for expansion.
How to invest
Investors interested in a future rebound in storage spreads should look no further than PAA Natural Gas Storage. The company, which was formed by majority owner Plains All American Pipeline (NYSE:PAA) is the best pure-play on natural gas storage. The company is spending more than $60 million dollars to expand its storage capacity at very attractive reinvestment rates. Finally, as an MLP, it pays out most of its income to investors; recently it was yielding more than 7.25%.
Another option for investors is Brookfield Infrastructure. The partnership currently controls 300 bcf of natural gas storage capacity which represents 7% of U.S. capacity. The bulk of these assets is part of the Natural Gas Pipeline Company of America, which is 20% owned by Kinder Morgan (NYSE:KMI). Brookfield Infrastructure also pays a very generous distribution to investors; currently, its units are yielding just over 4%.
As the nation's largest midstream operator, Kinder Morgan offers investors four unique ways to invest in its operations. As the largest natural gas pipeline and storage operator in the U.S., it'll benefit from any uptick in storage spreads but not to the same degree as PAA Natural Gas Storage. However, Kinder Morgan offers investors broad-based exposure to the growth of our natural gas industry.
Other midstream MLP's, like Energy Transfer Partners (NYSE:ETP), offer exposure to the natural gas storage marketplace. With 74 Bcf of storage capacity, Energy Transfer has a small but growing storage business. The company does benefit from any increase in storage spreads, which do affect its bottom line. In fact, for every $0.10/MMBtu change in seasonal spreads the company will realize $4.5 million of incremental annual EBITDA for its storage operations.
Foolish bottom line
Few investors even notice natural gas storage; it's not exactly the hot growth business that will lead to big gains. Those investors, like Brookfield, who are taking notice see nothing but opportunity. There are several ways to profit when spreads move higher, with Plains All American Pipeline or its pure-play storage operator PAA Natural Gas Storage among the most interesting opportunities.
Matt DiLallo owns shares of Brookfield Asset Managment. The Motley Fool recommends Brookfield Infrastructure Partners and Kinder Morgan. The Motley Fool owns shares of Brookfield Infrastructure Partners and Kinder Morgan. 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.