In June 2015, if all goes well, the first ships will sail through a newly enlarged Panama Canal. This expansion provides U.S. energy companies the opportunity to compete more aggressively for the Asian market. Today, it takes 41 days for large liquefied natural gas carriers or similar sized ships to travel from the U.S. Gulf Coast to Asia. Once the expansion is complete, the trip will take about 25 days. Here are three U.S. energy companies well positioned to capitalize on the Panama Canal expansion.
Refining, storage, and transportation
Most investors see Phillips 66 (NYSE:PSX) as an oil refining company, and with good reason. However, a big part of Phillips' business, particularly its export business, centers on natural gas liquids such as propane and butane. When exported, these commodities are known as liquefied petroleum gas. With growing U.S. production and growing worldwide demand for these products, Phillips looks well-positioned to profit.
In addition to the LPG export assets already in place, Phillips plans to build another export terminal at its Freeport, Texas facility. Feeding the Freeport terminal will be expanded fractionators located in nearby Mont Belvieu and Old Ocean, Texas. The fractionator expansion should come online in the second half of 2015, the export terminal in the summer of 2016.
Don't underestimate the importance of this export activity. Phillips and other refiners face a declining U.S. gasoline market. To keep refineries going, gasoline and LPG exports will need to grow. So far, Phillips has expanded its exports for three consecutive quarters with more growth on the immediate horizon. These exports, coupled with declining crude oil costs in the U.S., should fuel Phillips' profits in the coming years.
Storage and transportation
Not content to move energy across the U.S., Buckeye Partners (NYSE:BPL) expanded its operations to serve the Latin American market. With the Panama Canal expansion, the Asian markets now present a viable opportunity as well. Two recent acquisitions made all this possible. First, the 2011 purchase of terminals in the Bahamas. Second, the soon to be closed acquisition of terminals from Hess. These Hess terminals give Buckeye an expanded presence in New York Harbor, Puerto Rico, and the southern U.S. seaboard.
Why did Buckeye buy the Bahama and Puerto Rican terminals? I suspect two reasons. First, the terminals are strategically located for transport of crude oil and various refined products between the U.S. Gulf Coast, the U.S. East Coast, Europe, and Latin America. Again, the enlarged Panama Canal opens the door to Asia and the U.S. West Coast.
Second, the U.S. government makes it expensive to ship oil or other products directly between U.S. destinations. Specifically, to ship oil directly between U.S. ports, you must use U.S. registered ships, comply with U.S. regulations and use only U.S. crew members. By shipping oil to the Bahamas or other foreign destination first, a shipper doesn't have to comply with all those government demands and related expenses.
Buckeye boasts a track record of growing earnings and distributions. The distribution coverage ratio remains above 1.0, a healthy sign. Its debt has declined over the past year. The Panama Canal expansion offers a market for both Buckeye's oil and natural gas businesses. Low natural gas prices have weighed on past earnings. With easier access to Asian markets, higher natural gas volumes may turn this segment around.
Unlike Phillips or Buckeye, GasLog (NYSE:GLOG) operates liquefied natural gas carriers that move between producers and customers. Since its IPO in April of 2012, GasLog has steadily increased its fleet, revenues, and dividend. The future holds more of the same.
GasLog projects LNG demand will grow 4.7% a year through 2025. This growth will be led by demand from Asia and likely be supplied by natural gas produced from shale gas plays in the United States. By GasLog's calculations, shipping costs should not be a barrier for U.S. to Asia LNG deliveries. Japan currently pays about $16/MMBtu for natural gas. U.S. Henry Hub gas sells for $3/MMBtu. Add $1/MMBtu for gasification costs and shipping costs, at most $3/MMBtu, and it makes sense to ship LNG from the U.S. to Japan.
Can GasLog deliver for investors? The company's fleet has grown 50% since its IPO. The company took delivery of four LNG carriers in 2013, on time, on budget, and chartered from day one. This gives GasLog one of the youngest and most cost-effective fleets in the world. The company claims $2.2 billion in firm charters from BG Group and Royal Dutch Shell. So at the moment, the future looks good.
Final Foolish thoughts
All three companies will benefit from the Panama Canal expansion. Of the three, Buckeye looks to me like the one to gain the most. Its Caribbean terminals give Buckeye flexibility to move crude oil or other products up and down the U.S. Gulf Coast, the Atlantic Coast, and Latin America. The Panama Canal expansion simply opens Asia up to the same trade. These terminals are roughly 500 miles closer to the Canal than the Gulf Coast. Given their proximity to so much oil in the Gulf of Mexico, these Caribbean terminals position Buckeye well to send energy products to Asia.
Robert Zimmerman owns shares of Phillips 66. Robert Zimmerman has the following options: long February 2014 $72.5 calls on PSX. The Motley Fool has no position in any of the stocks 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.
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