The fundamental outlook for natural gas liquids remains a win, win, win situation for all players involved including E&Ps, MLPs and Petrochemicals. The key underlying fundamental driver is a low natural gas to crude oil price environment. As long as gas prices stay low relative to oil, producer economics will benefit from the uplift provided by NGLs and petrochemical companies will be incented to maximize the use of ethane and propane given their attractive margins relative to alternative oil-based stocks. We continue to believe the NGL growth story is intact and will be a dominant trend impacting MLPs over the course of the decade. MLPs will be presented with numerous opportunities to invest in the infrastructure required to connect growing supply and growing demand. Here are the stocks with the most exposure to NGLs.
Cheniere Energy, Inc. (LNG) is an energy company primarily engaged in liquefied natural gas -related businesses. The company owns and operates the Sabine Pass LNG terminal in Louisiana through its 90.6% ownership interest in and management agreements with Cheniere Energy Partners, LP (CQP). Cheniere also owns and operates the Creole Trail Pipeline, which interconnects the Sabine Pass LNG terminal with natural gas markets in North America. Cheniere Partners is developing a liquefaction project to provide bi-directional LNG import and export service at the Sabine Pass LNG terminal. Cheniere is trading at $16.36 but does not pay a dividend. For those seeking a dividend, Cheniere Energy Partners (CQP), 90% owned by Cheniere Energy, trades at $23.88 with a dividend yield of 7.11%. Both Cheniere Energy and Cheniere Energy Partners are strong natural gas plays.
Cheniere Energy represents a speculative investment on the successful execution of the company's plan to begin exporting liquefied natural gas from the U.S. Gulf by the end of 2015. The foundation of the plan is substantially in place with the signing of long-term (20 year) commercial agreements for three of the company's four planned liquefaction trains, and the signing of an EPC contract with Bechtel. Cheniere Energy (LNG) shares rose after Blackstone Group (BX) said it plans to invest $2 billion to buy senior subordinated paid-in-kind units of Cheniere Energy Partners LP (CQP), which is majority owned by Cheniere Energy (LNG). The investment will help pay for the equity portion of the cost of developing the cost of the company's gas liquefaction plant at Sabine Pass. Additional upside could materialize if a more substantial export market for U.S.-based natural gas develops in the coming years. Cheniere has two additional locations that could be used to develop incremental liquefaction capacity.
DCP Midstream Partners, LP (DPM) is engaged in the business of 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 natural gas liquids (NGLS) and condensate. DCP is well positioned to drive stable long-term growth, given its (1) sponsor's growth profile and large portfolio of assets that can be sold to DCP over time, (2) investment-grade balance sheet and liquidity that enable DCP to fund acquisitions and expansion projects, and (3) primarily fee-based or hedged margins that mitigate commodity price exposure.
DCP is trading at $49.27 with a dividend yield of 5.2%. DCP share prices have moved between a 52-week high of $49.93 and a 52-week low of $34.40 and are now trading 40% above that low price. We believe consistent quarterly distribution growth is set to resume at DCP and expect distribution growth to accelerate to an annual range of 6-8% beginning in 2012. This distribution growth, coupled with DCP's current yield of 5.2% provides an attractive total return proposition of 14%.
Enterprise Products Partners (EPD) is an MLP and leading provider of midstream energy services to producers and consumers of natural gas, NGLs, crude oil, refined products, and certain petrochemicals. Its integrated system links producers of natural gas and NGLs from supply basins in the United States, Canada, and the Gulf of Mexico to consumers in the United States and international markets. Enterprise is trading at $52.11 with a dividend yield of 4.7%. Enterprise share prices have moved between a 52-week high of $52.95 and a 52-week low of $27.85 and are now trading 87% above that low price. Enterprise will have growth from its crude oil pipelines and natural gas liquids (NGL) segments to drive earnings in 2012 and 2013. Enterprise will continue to benefit from the development of the shale plays and strong demand for NGLs from the petrochemical industry.
Enterprise is a core MLP holding given its expansive geographic footprint, integrated asset base, investment-grade balance sheet, strong track record of executing organic growth projects and integrating acquisitions, and innovative and entrepreneurial management team. In addition, Enterprise has a supportive general partner. The partnership is well positioned to grow its distribution by 5-6% over the next several years owing to organic growth opportunities around emerging natural gas shale plays, such as the Eagle Ford and Marcellus, favorable natural gas liquids fundamentals, and a competitive cost of capital. The value proposition consists of stable and growing cash flows that support an attractive tax-advantaged yield and distribution growth of 5-6%.
Targa Resources Partners LP (NGLS) is a limited partnership formed by Targa Resources, Corp, a provider of midstream natural gas and natural gas liquid services in the United States, to own, operate, acquire and develop a portfolio of midstream energy assets. The company is engaged in the business of gathering, compressing, treating, processing and selling natural gas and storing, fractionating, treating, transporting and selling NGLs and NGL products. Targa is trading at $42.86 with a dividend yield of 5.6%. Targa share prices have moved between a 52-week high of $42.96 and a 52-week low of $28.83 and are now trading near their 52-week high.
Targa had Q4 earnings per unit of $0.75, vs. $0.39, reflecting higher prices for natural gas liquids and condensates, and higher NGL and natural gas sales volumes. Targa has budgeted $1B of growth projects through 2013. Targa has a target price of $47 based on the target future yield of 5.5%, in line with the peer average.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.