3 Oil and Gas Pipeline Companies to Buy for Long-Term Growth
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As a result of global warming, oil and gas companies are shifting focus toward natural gas from coal as a source of energy generation. Natural gas produces less carbon dioxide compared to coal; driving the growing demand for it. Its global demand is expected to reach 342 billion cubic feet per day, or bcfpd, in 2015 from 298 bcfpd in 2007. Oil and gas pipeline companies are expanding their operations in accordance with the shift. Three companies from the oil and gas pipeline industry, which are expanding their operations to meet the demand of natural gas, are discussed in detail.
Rising oil prices an advantage
Spectra Energy (NYSE: SE) is expanding its existing Texas Eastern pipeline system by 16 miles. This will require an expenditure of $1.2 billion. This pipeline will help the company transport natural gas used in households in New Jersey and New York. The pipeline will deliver 800 million cubic feet per day of natural gas. The construction is expected to be completed by the fourth quarter of 2013. This expansion move is expected provide transportation revenue of $228 million this year, up from $217 million last year, and is expected to increase to $244 million in 2014.
Oil and gas field services include the gathering and processing of raw gas. The company's field services reported EBITDA of $88 million in the first quarter of 2013, down 5.8% quarter over quarter. The decrease was due to the lower price of NGL, but most of the price reduction was offset by high production volumes. With the rising demand for oil products, the company is increasing its 2013 volume to 10.8 trillion British thermal unit per day, or TBtupd, from 10.3 TBtupd in 2012.
Additionally, WTI crude oil prices will rise to an average of $90 per barrel this year from $78 per barrel last year. Both of these factors are expected to increase the EBITDA to $376 million in 2013 from $279 million in 2012.
Expanding with growing demand
Williams Companies' (NYSE: WMB) Redwater complex plant in Canada produces 425 million polymer-grade propylene annually, which is used to make plastic. Worldwide demand of propylene is expected to reach 97.5 million tons in 2015 from 17 million tons in 2011. With this growth rate, the company will add a new production facility to its existing Canadian plant known as “propane dehydrogenation,” or PDH, a cost effective method to produce propylene.
This method will be used in Canada for the first time by Williams. The company will spend approximately $855 million on this facility. The new facility will be in service by the end of 2015. Its polymer-grade propylene capacity is expected to increase to 1.6 billion annually which will serve the growing demand.
Marcellus is the hub of sedimentary rocks which can be used to produce natural gas. The company is expanding its production capacity for natural gas in Marcellus due to the increasing demand of power generation. Currently, the company has assets worth $4.7 billion and it will spend an additional $3 billion in the coming two years for this expansion. This will increase its natural gas production capacity to 3.5 bcfpd in 2015 from 2 bcfpd currently.
With the various expansion strategies adopted by management, the company expects to increase its revenue to $9.7 billion in 2013 from $7.5 billion last year and $10.8 billion next year.
Acquisition for additional benefits
Natural gas liquid (NGL) demand will continue rising globally at 5% - 6% annually through 2020 due to its easy storage and diversified usage. To meet the demand, Energy Transfer Partners (NYSE: ETP) is expanding its cryogenic processing plant at its existing plant, Godley, in Texas. This plant produces NGL by condensing natural gas. It has an estimated cost of $350 million and the construction is expected to be complete in the third quarter of 2013. This will increase total capacity at the Godley plant from 500 million cubic feet per day to 700 million cubic feet per day.
Energy Transfer Partners and Energy Transfer Equity (NYSE: ETE) follow a structure of master limited partnership. In 2012, both the companies formed a joint venture, Holdco. To expand its portfolio and simplify its structure, Energy Transfer Partners will acquire Holdco shares owned by Energy Transfer Equity. In return, Energy Transfer Equity will get $2.35 billion of Energy Transfer Partners’ shares and $1.25 billion cash. Energy Transfer Equity will become a general partner of the company.
According to this deal, Energy Transfer Partners will not pay full Incentive Distribution Rights, or IDR, payments on newly issued units to Energy Transfer Equity for the first two years. After two years, it will pay 50% of IDR to Energy Transfer Equity. IDR’s are the portion of earnings which are paid to general partners. It will be beneficial for the company to retain its earnings, or a portion of them, for the long-term. In addition to this, fully acquired Holdco is expected to contribute EBITDA of $475 million this year and $512 million next year.
Energy Transfer Partners is taking advantage of IDR payments from its general partner and is expanding its plant at Godley to meet demand for NGL. These strategies will bring incremental revenue to the company.
Spectra Energy’s field services will benefit from rising oil prices, and the expansion of its pipeline to transport natural gas to New Jersey and New York will generate additional revenue for the company.
Williams will be the first company to start the PDH method to produce propylene in Canada. The company's Canadian operations will also serve the demand of the U.S. petrochemical industry, in which the main component is propylene.
Therefore, a buy is recommended for all three stocks.
Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends 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!