A midstream company with its hand in natural gas distribution may not look like much right now but the slow systematic morph into a natural gas (post-coal) energy nation will allow companies like Enterprise Products Partners L.P. (EPD) continue to grow and prosper for years to come. This opens long-term growth investment opportunities for these types of companies.
Enterprise Products Partners L.P. (EPD) is a North American midstream energy company providing a range of services to producers and consumers of natural gas, natural gas liquids (NGLS), crude oil, and certain petrochemicals. It is also engaged in the development of pipeline and other midstream energy infrastructure in the continental United States and Gulf of Mexico.
Utilities and the Transition from Coal
As low cost gas takes over coal generation as a source of power, we are going to see a significant demand for natural gas which will eventually mean upward momentum on prices. But this pressure will take some time to work its way into the economic system. In the meantime this has a negative affect upon non-regulated energy businesses with the low prices and oversupply. The low gas prices mean lower margins of profit and earnings. At the same time, gas prices dictate power prices and this means lower power prices and lower power margins. It could take up to a year and a half for the economy to sort all this out.
With this growth comes the need for transporting the gas. Along with the other commodities, midstream companies like Enterprise Products Partners should have the incredible opportunity to keep growing. Aimee Duffy wrote an article about midstream companies and explained the opportunity:
"Every time you read about how much oil and natural gas the U.S. is producing right now, realize that all that energy needs to be gathered, processed, stored, and transported to refineries and other consumers."
And these companies can weather price movements well with minimal affect. She goes on to write:
"Most midstream outfits operate a business model based as much on fee-based contracts as possible, which means that unlike with our energy producers, it doesn't matter to midstream companies if the price of oil and gas falls to $1 or rises to $100."
The technology bringing in the natural gas exceeded the usage so prices are way down and it will take time for usage to pick up and pricing to follow. But as it does, expect companies like EPD to make great investments with steady growth and good dividends.
The Options Play
Enterprise Products Partners is presently trading at 54.40 and I would expect it to break out higher so we are going to buy the first option in the money.
- Buy a December 2012 call with a strike price of '52.50' (priced at $2.50)
- Sell a December 2012 call with a strike price of '55.00' (priced at $0.85)
- Net Debit to Start: $1.65
- Maximum Profit: $0.85
- Maximum Risk: net debit
- Maximum Length of Play: 3 months
Reasoning behind the Trade
- Oil prices rising and demand will pick up with QE3 in place now.
- Natural gas will continue to grow in demand systematically and shipment will be needed.