Natural Gas Opportunities for MLP Investors
One of the major expected drivers of MLP growth over the coming decade will revolve around the US natural gas story. In the past five years, natural gas production in the US has grown by 11.4 billion cubic feet per day (Bcfd) — a gain of more than 20%. Over that time frame the US surged ahead of Russia to become the world’s largest natural gas producer. In 2013 US production expanded once again to a new record of 66.5 Bcfd, which accounted for 20.5% of the global natural gas supply. Yet despite the surge in production, US proved natural gas reserves have risen by 86% since 2000.
The gains in US production were primarily a function of the pairing of hydraulic fracturing with horizontal drilling, which turned a huge volume of natural gas resources into natural gas reserves for the first time. (The difference is that a resource refers to a deposit in place, while the reserve refers to the amount that is technically and economically recoverable).
There are at least three areas of opportunity for MLP investors resulting from this surge in US gas production. The first, and safest avenue of profit is in partnerships that are building out natural gas infrastructure to connect major gas-producing areas like the Marcellus Shale to major population centers, or to terminals that are being built to export liquefied natural gas (LNG). The list of partnerships involved in transporting natural gas is long, but includes such names as Energy Transfer Equity (NYSE: ETE), Enterprise Products Partners (NYSE: EPD), Kinder Morgan Energy Partners (NYSE: KMP), and Boardwalk Pipeline Partners (NYSE: BWP). These partnerships tend to yield in the 3-6% range, and for the most part have relatively stable distributions (BWP being a notable recent exception with a drastic distribution cut earlier this year.)
The second, and riskier, option is to buy MLPs engaged in natural gas production. While these tend to have some portion of their output hedged against sharp price fluctuations, they retain much more exposure to the ups and downs of natural gas prices than the midstream partnerships, which function as toll collectors. EV Energy Partners (NASDAQ: EVEP), Atlas Resource Partners (NYSE: ARP), BreitBurn Energy Partners (NASDAQ: BBEP) and Memorial Production Partners (NASDAQ: MEMP) are some of the upstream (oil and gas production) partnerships in the US shale plays.
The third and most speculative category of MLP that should benefit from expanding US natural gas production is engaged in building and operating LNG export terminals, or in the operation of ships that carry LNG. As US LNG exports ramp up in the years ahead, partnerships that own fleets of special LNG carriers, like GasLog Partners (NYSE: GLOP), Teekay LNG Partners (NYSE: TGP) and Golar LNG (Nasdaq: GLNG) should flourish.
To understand why there is a rush to build LNG export terminals in the US, note that the shale gas boom has depressed natural gas prices in the US. This has helped create enormous price differentials in the past five years between US natural gas prices and liquefied natural gas (LNG) prices in Europe and Southeast Asia.
In 2013 Japan was the fifth largest natural gas consumer in the world despite paying over $12 per million BTUs more than the spot price in the US. This has created a big incentive to ship US natural gas to markets in northeast Asia and Europe.
Cheniere Energy (NYSE: LNG) created the Cheniere Energy Partners (NYSE: CQP) master limited partnership to own assets such as its Sabine Pass LNG export terminal under construction on the Louisiana/Texas border, as well as another LNG terminal in Corpus Christi. Cheniere has signed up a number of customers in Asia and in Europe to take advantage of the price differentials, and was first to obtain approval from both the Department of Energy (DOE) and the Federal Energy Regulatory Commission (FERC). The Sabine Pass facility is expected to be in service by late 2015 or early 2016.
Dominion Resources (NYSE: D) has filed the preliminary registration with the Securities and Exchange Commission (SEC) for Dominion Midstream Partners LP. Among the partnership’s assets would be Dominion’s LNG import terminal at Cove Point, Maryland, as well as a preferred equity interest in a proposed $3.8 billion LNG export terminal at Cove Point.
The biggest risk in the LNG export partnerships is that unless US natural gas production continues expanding at a rapid pace, it is almost a certainty that these export facilities will help drive US natural gas prices higher. This in turn will decrease the price differentials, and the appeal of these facilities. But first movers like Cheniere Energy Partners should enjoy several years of operation with limited competition.