- Colder than normal winter weather has led to depleted US natural gas stores.
- $50 - $150 / mmbtu spot prices in the worst weather have pointed out infrastructure deficiencies.
- US natural gas demand growth over the next 5-10 years is likely to outstrip supply growth.
- Natural gas pipeline and/or storage companies should benefit over that time.
This winter (2013-2014) in the US has been much colder than normal. In fact the US has seen no less than three different storms labeled "polar vortices". The US has dipped into its natural gas stores more than normal in order to keep itself warm through these times. As a consequence, US natural gas stores as of February 28, 2014 were -43.2% below stores last year at this point and -38.8% below their 5-year average. The chart below depicts the storage status well.
As readers can see stored natural gas volumes were down to 1,196 Bcf as of February 28, 2014; and there was the third "polar vortex" storm still coming over last weekend. That virtually ensures another draw down of -100+ Bcf for the week ending March 6, 2014. That will likely bring the total in storage to less than 1,100 Bcf. Soon users of natural gas will start to worry about there being any natural gas left in storage to use. Prices may rise still further, especially if the US sees yet another "polar vortex" before the end of the winter. Investors should keep in mind that most of the Great Lakes are now covered with ice, which is unusual. This prevents "warmer" water from evaporating to "warm" the surrounding air. It means that the Great Lakes region is likely to continue to see colder than normal temperatures until that ice melts, even without a new polar vortex storm. On top of this the weather forecasts for the US summer are for a hotter than normal summer. More natural gas will likely be used for cooling, which means probably less than normal will be added back into storage.
The above should translate into higher profits for pipeline companies, especially those in the northeast and the Great Lakes areas. California also ran very low on natural gas. The harsher weather should mean more profits for many Marcellus natural gas producers, who managed to produce more gas during this crisis. It will also point out the need for more natural gas storage and more pipelines to bring relief to stress areas. That will mean more business and more profits to those supplying that storage and the transportation to and from that storage and from natural gas production fields. Since it is often pipeline or natural gas utility companies that supply some of the storage, this situation should be positive for them longer term too.
Of course, many will say the above is only a one year phenomenon, although we are more consistently having dramatic weather with increased global warming. Hence I mention the many reasons for increased US natural gas demand in future years. One of the biggest is the expected extra demand from LNG (liquefied natural gas) export. This will start ramping up beginning in Q4 2015 (current schedule) with the first 2.2Bcf/d to be exported from Cheniere Energy's (NYSEMKT:LNG) Sabine Pass LNG plant. After that Devon Energy (NYSE:DVN) estimates US LNG export capacity will grow to 15.2 Bcf/d - 17.2 Bcf/d by 2020 and to 33.1 Bcf/d - 35.1 Bcf/d by 2026. This growth alone should increase natural gas demand; but that is not all of the growth that is expected. The table below describes the first few years of the expected increased demand due to LNG exports.
The table below from Vanguard Natural Resources (NASDAQ:VNR) compares how the Sabine Pass LNG plant (mentioned above) and the other new sources of demand are expected to compare to the new sources of supply over the same time period.
The table above does not begin to estimate the full follow on LNG export demand that is likely to occur before 2020. The table also completely overlooks the expected increases in exports to Mexico via pipeline that are expected to occur. A Barclay's report estimates that exports to Mexico will increase from 2 Bcf/d in 2013, to 2.2 Bcf/d in 2014, to 3.5 Bcf/d in 2015, to 4.5 Bcf/d in 2016. The Mexican demand growth is expected to continue from there. In another estimate, Goldman Sachs forecast a jump in export capacity to Mexico to 4.8 Bcf/d by 2015. Splitting the difference, this likely means another 2+ Bcf/d in US natural gas exports by sometime in 2015; and it is already 2014 now. The VNR table above did not even mention this extra source of US demand. Nor did the table speculate about a NatGas for Transportation bill from the US Congress, which the Congress has been considering for years. Such an act would be sure to spur a considerable increase in US natural gas demand.
As it is US natural gas prices have risen from a near term low of $3.379/mmbtu on November, 15, 2013 to a recent high of $6.493/mmbtu on February 24, 2014. As of this writing on March 9, 2014 US natural gas prices have fallen again to $4.592/mmbtu. Given that there was another "polar vortex" storm during the week to be reported this Thursday, investors can expect another draw down of -100+ Bcf from US storage. This will leave US stores dangerously low at below 1100 Bcf. They might even be below 1000 Bcf. Stores this low (and prices as high as $6.493/mmbtu) will tend to encourage the build out of future storage. They will tend to encourage the build out of new pipelines and the development of new wells. One expert, Bill Powers, expects US natural gas prices to fluctuate in the $5-$7/mmbtu range over the next several years. He also cited recent $150/mmbtu spot prices paid by some NY energy utility companies. He cited some New Hampshire papers mills as paying $50+/mmbtu during the recent cold snap(s). Another article pointed to Maryland spot prices going to $120/Mcf (1 Mcf = 1 mmbtu), when the Calvert Cliffs Nuclear Station shut down in January 2014 because of an electrical problem brought on by the snow and ice. There is a clear need for more infrastructure.
Building out infrastructure takes time and planning. It is also unclear at the moment just how quickly more infrastructure will be needed. Therefore there probably has not yet been enough of a stimulus to push companies into huge new additions. However, the companies that are already in the process of building such infrastructure stand to benefit in the near term. They will be the ones to soak up the increased demand for their services. It will probably also be the biggest and most fiscally able pipeline companies that will be able to plan and start long term projects relatively quickly, so these companies should benefit.
One project, the Constitution Pipeline, started the pre-filing process in April 2012. It is supposed to go into service in late 2015 or early 2016. This approximately 124 mile, 30-inch pipeline will be buried underground. It would upon completion extend from Susquehanna County, PA to the Iroquois Gas Transmission system and Tennessee Gas Pipeline system in Schoharie County NY with many counties in between. This may alleviate some of the pressure on NY in the future. It should benefit the owners/planners, Williams (NYSE:WMB), Cabot Oil & Gas (NYSE:COG), Piedmont Natural Gas (NYSE:PNY), and WGL Holdings (NYSE:WGL). It also shows that the management of these companies is thinking ahead, which is a very good characteristic for management.
The biggest natural gas pipeline companies are also sure to benefit (WMB above is one of the biggest). Enterprise Products Partners (NYSE:EPD) has numerous natural gas and NGLs (natural gas liquids) projects in progress such as the expansion of the Mid-America Pipeline (Rocky Mountains expansion). This is expected to be completed in Q1 2014. EPD assets include approximately 50,000 miles of onshore and offshore pipelines and about 14 Bcf of natural gas storage capacity.
Kinder Morgan is a family of four major publicly traded companies: Kinder Morgan Inc. (NYSE:KMI), Kinder Morgan Energy Partners LP (NYSE:KMP), Kinder Morgan Management LLC (NYSE:KMR), and El Paso Pipeline Partners (NYSE:EPB). They often cooperate to bring new pipelines to the US. The Northeast Expansion project is current in "Open Season" (getting commitments from future clients) from February 13, 2014 to March 28, 2014 at 4pm CDT. The recent spike in natural gas prices should help it sign up more future customers. This project is expected to address the need for additional pipeline infrastructure and firm transportation in the Northeast US. Tennessee Gas Pipeline LLC, a subsidiary of Kinder Morgan Energy Partners is developing the project. It is expected to transport 600,000 Mcf/d to 2.2 Bcf/d. Kinder Morgan is a huge group of companies with over a $110B market cap. It owns an interest in or operates approximately 80,000 miles of pipelines and 180 terminals (including significant storage facilities).
There are any number of other large natural gas pipeline companies, and natural gas storage companies. There are many new NGLs (natural gas liquids) pipelines being built. I will save all of that for future articles. I hope the above is helpful to investors. Investors should also be aware that they should do their own due diligence on any of the above mentioned stocks they may be interested in buying.
The two year chart of EPD gives a sample of the possible technical behavior of pipeline stocks.
The slow stochastic sub chart shows that EPD is near overbought levels. The main chart shows that EPD is in a strong uptrend; and it has been for a long time. This uptrend is showing no signs of weakening. EPD has a PE of 23.85 and an FPE of 20.68. It has an average analysts' EPS next five year growth estimate per annum of 6.10%. This probably only "okay" to many; but don't forget that EPD has an annual dividend of 4.17%. Further EPD is a strong company with long term contracts that generally range from 5-10 years. It should be able to withstand economic downturns fairly well. It is one of those stocks that investors can just "OWN" for the long term (or it has been). They can collect the good dividend, and they can let the stock appreciate. It is a good retirement account stock. The average analyst gives it a recommendation of 1.6 (a strongish buy).
Near term EPD is overbought. Investors may wish to wait for a market retracement before buying it. Alternatively they may wish to average in over 2014, since the overall market itself seems due for a much more drastic pullback at some time.
NOTE: Some of the fundamental fiscal data above is from Yahoo Finance.
Good Luck Trading.