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Summary

  • The depleting inventories and the decrease in production will keep the natural gas prices strong in the short-medium term.
  • The potential for the natural gas exports is huge, and the companies with natural gas assets should benefit hugely over the next few years.
  • ETP's large natural gas asset base will allow the partnership to exploit the growth opportunity in the natural gas segment.

The largest natural gas pipeline system in the United States gives Energy Transfer Partners (NYSE:ETP) an edge over other energy MLPs due to the recovering natural gas prices. The natural gas prices faced a serious slump over the last two years due to excess supply in the market, due to which almost every player in the market started to convert its natural gas assets into other profitable variants. ETP has also made efforts to shift its focus from natural gas to crude through the Trunk line pipeline which will be completed in 2015.

However, the situation has materially changed for the natural gas market over the last few months. Colder-than-expected winters, depletion of inventories and the prospect of exports have supported the rising natural gas prices in the domestic market. Furthermore, the recent political disturbance between Russia and Ukraine is also expected send commodity prices higher.

Natural Gas Exports: The Most Important Outlet for Natural Gas Companies?

The natural gas exports are going to become one of the most important outlets for the natural gas players over the next few years. Most of the companies are making an effort to attain export license and put up a liquefaction plant, as natural gas will be exported as LNG (Liquefied Natural Gas) to the Asian and European countries. Recently, ETP's unit received approval for extending its pipeline and exporting natural gas to Mexico, which has become one of the biggest consumers of the U.S. natural gas.

The increasing trend in natural gas exports is enhancing the profitability of the energy sector companies. The government is also eagerly supporting the export of natural gas and natural gas liquids (NGL), with the approval of three terminals by Federal Energy Regularity Commission (FERC) for either building new terminals to export or to convert existing import plants to export facilities, bringing the total number of export terminals approved so far equal to seven.

Russia is currently the biggest supplier of natural gas to the European countries, and a large part of the natural gas exported by Russia reaches Europe via pipelines that cross the territory of Ukraine. However, the recent ongoing tensions between Russia and Ukraine have put serious doubts over the future outlook of gas supply to Europe. Although the European countries are willing to adopt a strong position on Russia over the crises in Ukraine, those countries, however, are heavily dependent on the Russian gas. As a result, they are facing serious problem in their interaction with Russia.

Natural Gas Reserves: What's left with ETP?

Keeping in mind the growing demand of natural gas exports in the world, the prices will remain strong in the short-medium term. ETP, through its interstate transportation and storage segment, owns and operates approximately 7,800 miles of natural gas transportation pipelines in the U.S, which will help the transportation to the export facilities. The vast acreage of natural gas assets of the partnership allow it to take huge benefit from this opportunity. ETP also partnered with Lake Charles Exports, an entity owned by BG LNG Services, in the last year to export LNG in order to meet the growing global demand. The project also received approval from the Department of Energy, granting authorization to export up to 15 million metric tons per annum of natural gas liquids. Moreover, FERC also issued a presidential permit to a project that allows the partnership to build a 37 km pipeline linking Hidalgo County in Texas to the city of Reynosa in Tamaulipas state of Mexico. The demand of natural gas in Mexico also surged over the last few years, and stood close to 10% of the U.S current natural gas output growth. The approval for this project is expected in the next year; however, the increased pressure on the Government enabled FERC to speed up the process. The partnership is also increasing its footprints in the natural gas due to the increasing demand. ETP recently received approval from the U.S. Environmental Protection Agency to build a $325 million natural gas processing plant west of Houston, Texas.

The major oil companies are currently shifting their focus away from natural gas due to massive decline in margins over the last two years, such as Chevron (NYSE:CVX), which allocated a meager 2% of its capital spending in the natural gas projects. Other producers also followed this trend and decreased their production of natural gas. Moreover, according to the U.S. Energy Information Administration, the total natural gas storage capacity stood at 6.3 million cubic feet at the start of this year, which is the lowest in the last decade. However, if the demand pattern continues to remain the same in the coming few quarters; this will lead to shortage of supply and will substantially increase the natural gas prices in the future.

Conclusion

The huge natural gas asset base of Energy Transfer Partners, and the opportunity to export it in the growing market led by substantial demand will enable the partnership to reap hefty benefits in the coming few years. The export potential, along with a better balance in the demand and supply in the local market will keep natural gas prices at higher levels, and the companies with natural gas assets will be able to benefit over the next few years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.

Source: Energy Transfer Partners Set To Grow