It's The Infrastructure, Stupid
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
"When everyone is looking for gold it's a good time to be in the pick and shovel business," said Mark Twain. I've already covered regional banks in the Marcellus and Bakken shale regions that stand to make money, but now it's the infrastructure plays. In a nod to Bill Clinton's strategist James Carville, "It's the infrastructure, stupid."
Suddenly, oil and gas MLPs are hot again with the IPO of USA Compression Partners and even an ETF dedicated to the group, the Global X Junior MLP ETF. A Carl Icahn name is expected to IPO shortly as CVR Refining and yield is expected to be over 18%.
According to a Business briefing article in Time's January 21 issue on how to grow the US economy, the second best way to grow jobs and pump up GDP is to support the shale gas and oil industry. Already, the natural gas and oil boom is responsible for putting 1.7 million people to work. In particular, Dan Yergin, vice-chairman of IHS Cambridge Energy Research Associates, told Time that we need infrastructure (pipelines and production) to move output from North Dakota to the East Coast.
An important white paper by Marc S. Lipschultz for KKR called "Historic Opportunities from the Shale Gas Revolution" emphasized the importance of pipeline infrastructure saying, "Finally, there must be support for, and action to encourage development of a natural gas export infrastructure. In our view, Liquefied Natural Gas (LNG) exports are expected to play an important and constructive role in maximizing the domestic economic benefits of the shale gas revolution."
The pipeline partnerships
One name to consider is DCP Midstream Partners (NYSE: DPM), which is a midstream master limited partnership. Its ownership and management is a little complicated so, from the corporate profile: " DCP Midstream Partners, LP is managed by its general partner, DCP Midstream GP, LLC, which is wholly owned by DCP Midstream, LLC, a joint venture between Spectra Energy and Phillips 66." Don't let the master limited partnership structure scare you off because of the tax paperwork. (Most of their corporate websites offer assistance and/or tips in dealing with the K-1). These are ideal for long term holds in a retirement account.
DCP Midstream gathers, compresses, treats, processes,stores, transports and sells natural gas, NGL and condensate (natural gas liquids), and distributes propane to the wholesale markets. As a master limited partnership it pays a distribution of $2.72 a share for approximately a 6.60% yield. While DCP dropped some 13% in 2012 the company was very optimistic on their Q3 earnings call in November about 5 new cryogenic plants in the Eagle Ford, " with 760 million a day of processing capacity, approximately 6,000 miles of gathering systems, and 36,000 barrels per day of fractionation capacity." The P/E is at 33.72 with a PEG of 1.37. Analysts expect five year earnings growth at 16.41%.
Spectra Energy (NYSE: SE) and Phillips 66 (NYSE: PSX) are not just silent partners, but actively investing $5-7 billion with hopes that DCP Midstream will be worth $15 billion by 2017. That shouldn't be a stretch as the company enjoyed 2011 revenue of $12.9 billion. DCP Midstream is in that infrastructure pipeline sweet spot that Yergin spoke of as seen in this map from the company website.
Energy Transfer Partners (NYSE: ETP) is another midstream pipeline play with 23,500 miles of it. It has a 7.60% distribution yield and a 10.87 P/E. It is also much larger than DCP Midstream. This year it acquired Sunoco and its stake in Sonoco Logistics Partners for a more diversified energy portfolio than its formerly natural gas heavy emphasis.
Energy Transfer Partners has been a busy bee lately what with the Sunoco buy and it's also been switching its Trunkline from natural gas carrying capability to crude oil (although it can still take away gas) as it makes the transition from dependence on natural gas which hasn't rewarded them yet with higher prices to crude which somewhat hedges their bets.
Profit with the proud partners
The easiest way to invest in shale infrastructure if you are still wary of limited partnerships is to go with Phillips 66. Phillips 66 has performed very well since being spun off from ConocoPhillips in 2012. It has risen from $28.75 to $55.83 and it's pennies away from that 52 week high. The P/E is 6.35 with a yield of 1.80%. The company reports again on January 30.
Forty percent of their income is from chemical and midstream operations with refining and marketing taking up the lion's share. Phillips 66 itself is planning a spin-off in 2013, likely creating a master limited partnership of some of their pipeline and NGL assets. Yes, I know it's convoluted and complicated. Analysts are concerned about revenues dropping going forward so be careful with this one.
Spectra Energy has a higher yield at 4.40% and a 17 P/E. The company is reporting on February 5 and after announcing the 2013 financial plan on January 16 preannouncing guidance of 2013 EPS of $1.50 there should be few surprises. The company owns over 19,000 miles of pipeline and over 300 billion cubic feet of storage for natural gas.
The pipeline takeaway
Risks to all these companies include environmental protests and anti-fracking sentiment like the back and forth over the movie Promised Land with its plot of Matt Damon as an industry rep trying to win over a small Pennsylvania town to allow fracking. But keep in mind pipelines are the takeaway medium that allows oil drillers to stop "flaring," a wasteful practice of burning off natural gas as a byproduct of drilling so pipeline takeaway infrastructure is environmentally responsible. Ever present risks are accidents, volatility of gas and oil pricing, and market sentiment.
However if you are in the MLP names, you are in for the long haul and should do very, very well. Sentiment for refiners like Phillips 66 can ebb and flow. Spectra Energy already guided below consensus of $1.55 but it's a reliable long term name with over 100 years in the business.
leglamp has no position in any stocks mentioned. The Motley Fool recommends DCP Midstream Partners, LP and Spectra Energy.. The Motley Fool owns shares of Spectra Energy.. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!