The NGL market in the US is entering a multi-year strong growth phase. Thanks to the use of new drilling techniques, shale plays have started a new boom in the supply of natural gas. The economics of this drilling activity is positively impacted by the natural gas liquids and it has been one of the main drivers of drilling in “wet” gas plays. These cheap natural gas derivatives have been a boon to the inputs of domestic petrochemical producers vs international ones (especially Asia) which have a clear cost advantage over crude based naphtha feedstocks. As well as new capacity adds, we are seeing domestic petrochemical plants converting existing capacity from naphtha to ethane.
This has resulted in ethane demand reaching new highs and it is expected to increase by another 50% over the past 5 years according to some street estimates. Furthermore this strong production trend for NGLs is further underlined by EIA’s production estimates that project total NGL production growth ticking up to 2-3% from the current 10-year average of 1%. The price advantage of ethane and NGLs continues to be strong (at 35% of WTI vs 100% for naphtha), which ensures that there is a good cushion for ethane prices to erode, without impacting the strong economics of wet gas plays.
However, one of the major difficulties for the NGL industry is the infrastructure situation as new shale gas plays are mostly not close to major infrastructure areas. This poses a significant opportunity for midstream energy infrastructure companies that have exposure to NGL assets through liquids infrastructure and connectivity to producers and/or downstream customers (refineries and petrochemical plants). While larger companies like Oneok Partners (OKS), Enterprise Products Partners (EPD), Williams Companies Inc. (WMB) and Enbridge Energy Partners (EEP) all rovide exposure to the theme in general, the companies below provide a good investment opportunity through their higher NGL exposures for those investors that seek a high dividend yield underwritten by strong business fundamentals.
MarkWest Energy Partners LP (MWE): MWE is a master limited partnership engaged in the gathering, processing and transportation of natural gas; the transportation, fractionation, storage and marketing of NGLs; and the gathering and transportation of crude oil. Its operations span the Southwest, Northeast and Gulf Coast. It has a joint venture with M&R MWE Liberty of The Energy & Minerals Group, which operates in the Marcellus Shale an area with a high NGL content. It has projects under development with EQTCorp. (EQT), Chesapeake (CHK) and Sunoco (SUN). With a market cap of 3.7bn and an EV of 5.2bn, the company sports a strong 5.9% dividend yield. It is expected to exhibit a DPU growth of over 15% in 2012 over 2011. Its current distributable cash flow covers the dividend by 1.5x. While the debt to total capitalization is on the higher side (c 50%) vs peers, the interest cover is over 4.4x with high current liquidity of over $400mn.
Crosstex Energy (XTXI) (XTEX): Crosstex is engaged in the gathering, transmission, processing and marketing of natural gas and natural gas liquids, or NGLs. It concentrates on North Texas Barnett Shale and on Louisiana, with its assets of over 3,300 miles of natural gas gathering and transmission and NGL pipelines, nine natural gas processing plants and three fractionators. It has three organic projects under development including one in Eagle Ford Shale, one in the Permian Basin with Apache (APA) and an expansion of its pipeline to access Mont Belvieu. With a market cap of 0.7bn and an EV of 1.5bn, the company sports a strong estimated 8% dividend yield, which is expected to grow 2.6x the 2010 annual dividend by 2012. Its current distributable cash flow covers the dividend by over 1.5x. The debt to total capitalization is on the higher side (c 50%) vs peers, but is covered 3.8x.
Atlas Pipeline Partners (APL) also Atlas Energy (ATLS): APL is active in the gathering and processing segments of the midstream natural gas industry. It has five natural gas processing plants and 8,600 miles of active natural gas gathering systems located in Oklahoma, Kansas, and Texas and 1,000 miles of natural gas gathering systems in the Appalachian Basin. It offers a high NGL exposure and growth potential with over $400mn capital project announcements. With a market cap of 1.7bn and an EV of 2.1bn, the company sports a strong estimated 6% dividend yield, which is expected to grow by over 25% in 2012. Its current distributable cash flow covers the dividend by over 1.4x. The debt to total capitalization is c 35% vs peers, but is covered 1.9x by EBITDA.
Targa Resources (NGLS) and (TRGP): Targa is a leading provider of midstream natural gas and natural gas liquid services in the United States. It has multiple expansion plans that covers the Mount Belvieu, North Texas and Wolfberry and Canyon Sands plays. With a market cap of 2.9bn and an EV of 4bn, the company sports a strong estimated 6.7% dividend yield, which is expected to show a long-term growth rate of around 7% per annum. Its current distributable cash flow covers the dividend by over 1.45x. The debt to total capitalization is high at over 60% vs peers, but is covered 3.1x by EBITDA.
Western Gas Partners (WES): WES is an MLP organized by Anadarko Petroleum and as a result over 74% of its total natural gas gathering, processing and transportation throughput was comprised of natural gas production owned or controlled by Anadarko. It has over 7,700 miles of pipeline in the Rocky Mountains, Mid-Continent, East Texas, and West Texas Regions that exhibit substantial presence in liquids-rich basins. With a market cap of 3bn and an EV of 3.6bn, the company provides the investor with a 4.7% dividend yield, which is expected to show a 15% dividend growth in 2012. Its current distributable cash flow covers the dividend by over 1.6x. The debt to total capitalization is very manageable at 37% vs peers, and it is covered 2.8x by EBITDA.
DCP Midstream Partners (DPM): DPM is engaged in gathering, compressing, treating, processing, transporting, storing and selling natural gas; transporting, storing and selling propane in wholesale markets; and producing, fractionating, transporting, storing and selling NGLs and condensate. It is supported by Spectra Energy (SE) and ConocoPhilips (COP) and has over 5,000 miles of pipeline. It has many growth projects, which include a newly announced natural gas processing plant in the Eagle Ford shale, Southern Hills NGL pipeline and Sandhills NGP pipeline. With a market cap of 1.7bn and an EV of 2.4bn, the company sports a strong 6.7% dividend yield, which is expected to show 10% dividend growth in 2012. Its current distributable cash flow covers the dividend by over 1.1x. The debt to total capitalization is at 50%, and it is covered 3.7x by EBITDA.