My last article discussed three blue-chip MLPs that should profit from the new opportunities provided by the next energy boom. As a matter of fact, unconventional oil from shale formations is rapidly becoming an important and abundant resource in the U.S. About 25.3 billion barrels of tight oil are expected to be produced cumulatively from 2012 through 2040, which makes this unconventional resource account for about 33% of total U.S. oil production.
Notably, a fast rise in shale oil production would have a dramatic effects on pricing, as the shale gas revolution taught us. As a result, E&P companies would need to reassess their entire asset portfolios and carefully review their business models, forcing them to sell maturing assets earlier than expected to midstream companies. The objective would be to get back a certain return on investment and reallocate capital elsewhere.
According to the Energy Information Administration, the increase in U.S. supply is resulting in the drop of net imports of petroleum and other liquids, which supports lower oil prices, as shown in the chart below.
Source: EIA Annual Energy Outlook 2013.
Therefore, I found three underrated MLPs that would profit from that context, given the assets already in place. These MLPs are set for a substantial boost in growth, since mature asset acquisitions should occur more in the next few years, generating large cash flows. Let's take a look at these three hidden treasure chests.
The three hidden MLP treasure chests
Source: NuStar map of operations, NuStar Energy.
My first MLP is one of the largest independent liquids terminal and pipeline operators in the U.S. It also owns and operates midstream assets in Canada, Mexico, the Caribbean, the Netherlands, the U.K., and Turkey. NuStar Energy (NS 0.79%) has 8,573 miles of pipeline and 87 terminal storage facilities, with approximately 97 Mmbbls of capacity.
NuStar also transports refined products from Valero Energy's refineries to its terminals for mid-continent distribution. The company's revenue comes from two separate activities, the pipeline and the storage segments. Between 2006 and 2013, fee-based EBITDA increased approximately $225 million. Its steady growth is no stranger to its presence in unconventional resources such as the Eagle Ford shale.
Transmontaigne Partners (TLP), offers transportation services of crude, light and heavy refined oil, chemicals, and fertilizers in five regions around the U.S. The company owns 49 terminals with total storage capacity of 23.7 million barrels. Transmontaigne saw its storage capacity increase by more than 14% in four years from 2008 to 2012.
Source: Transmontaigne's Enercom Consulting Conference, August 2013.
Furthermore, the company is developing a new project called Bostco, in partnership with Kinder Morgan, that will add a new black oil terminal in the Houston Ship Channel with approximately 7.1 Mmbbls of storage capacity. Transmontaigne owns a 42.5% working interest in the project and Bostco will be well positioned to meet the growing demand for export capacity on the Gulf Coast.
My last hidden MLP treasure chest is yet another relatively unrecognized midstream company that owns the longest refined petroleum products pipeline system in the U.S., more than 9,600 miles in length, including 50 terminals.
Magellan Midstream Partners (MMP) provides transportation, storage, and distribution services for refined petroleum products and liquefied petroleum gases in 13 Midwest states. Magellan also owns five marine storage facilities and 27 inland storage terminals, and distributes petroleum products in 12 states.
Source: Barclay's CEO Energy-Power Conference, Magellan Presentation, September 2013.
Magellan is focused in the Permian area with its Longhorn pipeline, in which its full 225Mbbls/d capacity is already committed. The company is currently seeking regulatory approval for a 50Mbbls/d expansion. Another project under way is the BridgeTex pipeline project, a joint venture with Occidental Petroleum. The pipeline will have an initial capacity of 300 Mbbls/d and is expected to be commissioned in mid-2014.
Finally, the company is committed to a joint-venture with Kinder Morgan to transport condensate from the Eagle Ford shale to Magellan's 500 Mbbls/d Corpus Christi terminal. The 140-mile double pipeline has a capacity of 100 Mbbls/d.
My Foolish take
The three hidden MLP treasure chests are well-positioned midstream companies in the U.S. energy industry and are developing quite nicely. These MLPs have tremendous upside and should profit from oil shale boom opportunities.
So, investing in MLPs makes a lot of sense, whether they are mid-caps or large-caps. They represent good investment opportunities for steady cash flow as well as a diversified approach to commodity volatility. Related transportation and storage activities add to these MLPs' value.
