Editor's note: A previous version of this article stated that the EPNG pipeline would be acquired by El Paso Pipeline Partners through a drop down acquisition, when in fact there are no plans for such an acquisition. The Fool regrets the error.
A core Foolish principle is to invest in quality companies with excellent management and a clear growth thesis. This article is designed to point out several energy trends that income investors may not have heard about and two MLPs that can help them profit handsomely, both in terms of income and capital gains.
Marcellus shale and ethane exports
The Marcellus shale is America's largest gas field, estimated to contain as much as 410 Tcf (trillion cubic feet) of recoverable natural gas -- 15 years worth of American production.Its predicted lifespan is the longest of any shale formation at 110 years.
The Marcellus has proven a prolific gas producer, with daily production increasing 14-fold in just the last seven years (1 Bcf/day in 2007 to 14 Bcf/day in 2014). Production is predicted to continue growing, potentially hitting 20 Bcf/day by 2017-2018.
Part of natural gas production is natural gas liquids (ethane, propane, butane), and right now there is a major glut of ethane resulting in rock-bottom prices due to lack of transportation and storage infrastructure. This is causing many producers to "reject" ethane. Rejection means shipping the ethane as part of natural gas rather than refine it out into a separate compound, which is valuable as a petrochemical. Enterprise Products Partners estimates that NGL production will increase by 79% through 2020, a response to a doubling of LNG export demand (largely from Europe).
The reason ethane requires its own pipelines is because it burns hotter than regular natural gas (methane). The lack of dedicated pipelines is why producers have had to reject ethane (and sell it as part of natural gas fuel instead of a more valuable petrochemical). In 2013 200,000 bpd were rejected. In 2014 that number is predicted to climb to 450,000 bpd. This waste represents a major growth opportunity for certain MLPs.
Mark West Energy Partners (UNKNOWN:MWE.DL) is one of the largest MLPs active in the Marcellus shale, with 1.6 Bcf/day of processing capacity (20% of Marcellus production in 2013).
The company is investing $1.6 billion in 2014 as part of a 16-facility Marcellus buildout. This includes nine processor plants with 1.92 Bcf/day capacity and seven de-ethanator/fractionator plants.
In addition to massive expansion designed to cash in on the world's fastest growing gas field, Mark West is investing heavily into ethane exports. It has two joint ventures with Sunoco: the Mariner East and Mariner West ethane pipelines.
The Mariner West pipeline will initially transport 20,000 bpd to Ontario, but then ramp up to 50,000 bpd. Mariner East will transport 70,000 bpd to Philadelphia, where it can be exported.
Due to its massive investment in the prolific Marcellus shale and ethane pipelines, management is guiding for a 27%-43% increase in distributable cash flow/unit in 2014. This should allow for very strong distribution growth.
With such massive growth ahead of it (analysts are predicting 60% EPS growth over the next decade), income investors can enjoy strong capital gains, and a very safe 5.3% distribution with a history of fast growth (9.92% CAGR over the last 11 years) that is likely to continue.
LNG and gas exports to Mexico
El Paso Pipeline Partners (UNKNOWN:EPB.DL) is part of the Kinder Morgan empire and has recently faced a brutal price decline due to weak 2014 distribution guidance (2% distribution growth and then no growth for five quarters). This despite major drop downs from its parent company Kinder Morgan Inc.
The difficulties El Paso is having stem from weaker prices on contract renewals in its rocky mountain pipelines. The drop downs it will receive in 2014 will guarantee the security of its current yield but future distribution growth will require growth catalysts. Luckily El Paso has two.
The first is gas exports to Mexico, which according to the Energy Information Administration (EIA) have been growing at 12.5% CAGR.
The second major growth opportunity for El Paso is its SNLG terminal on Elba Island near Savannah, Georgia. This terminal (1.8 Bcf/d export capacity), along with the Elba Express pipeline (connects terminal to rest of southern pipeline network) are 100% owned by El Paso and is fully contracted for 21 years (Elba Express for 29 years). The SNLG terminal will come online in 2016 and reach maximum capacity by 2018.
With the Marcellus shale production growth exceeding all expectations, LNG exports are likely to be a major energy megatrend in the coming decades. Kinder Morgan is expecting to further expand its LNG export capabilities and El Paso Pipeline (and its investors) are likely to benefit immensely.
Markwest and El Paso Pipeline Partners represent excellent plays on major energy trends that are likely to continue for decades to come. Patient, long-term investors now have a chance to lock in great yields (with good distribution growth prospects) and the potential for serious capital gains.