Averaging less than $3.00 per million British Thermal Units, BTUs, over the past couple of years, natural gas, NG, is approximately one third the price it was back in 2005. Additionally, many experts believe that current price levels will remain through at least the next five years. This, of course has been the result of huge reserves being tapped in areas such as West Virginia, Pennsylvania and Ohio, as fracking has made previously unavailable reserves of NG, accessible. Pipelines act as "toll roads" and are paid as product flows through the pipes with no direct relationship to the price of oil or NG. Nevertheless, as wells have shut down due to oversupply, and drillers have come to the point of bankruptcy (or were perceived to), pipeline master limited partnerships, MLPs, have lost value over market concerns that their customers would not be able to meet their contractual obligations. So, with low prices for NG likely to be with us for a number of years, how badly will this impact Energy Transfer Partners, ETP, one of the largest MLPs building and servicing oil and NG pipelines?
Yes, it is true that US production of NG is at an all-time high, and in fact the US now leads the list of NG producing countries. Additionally, it seems that new methods of extaction, as well as newly discovered reservoirs of NG continue to increase the source of supply. Do the laws of supply and demand mean that it will be more and more difficult for drillers to make money? Will this negatively impact the pipelines as drillers may not be able to meet long term contractual obligations to pay the MLPs that own and maintain the pipelines? Will the conversion of coal burning power plants to the use of NG in the US sufficiently increase demand to offset the tremendous increase in supply over the past decade? Are there other factors in play that will have a major impact?
The last question, perhaps is the most significant. But first let me address an obvious question. Is one of those other factors the upcoming merger with Sunoco Logistics? It is my opinion that the merger will have no impact other than reducing expense as a result of the immediate reduction in distribution which is built into the merger proposal. But there are clearly other major factors which will have a major impact on the pipeline MLPs.
Despite the perceived risks over the past few years with the lower price of NG, ETP and other MLPs have continued to build out new pipelines which will make low cost NG available to previously unserviced or underserviced parts of the US, Canada and Mexico. Equally important, there are soon to be completed new pipelines which will make low cost liquid natural gas, LNG, available for export overseas. These new pipelines, along with new LNG export terminals are projected to make the US the third larges exporter of NG by 2018 according to the US Energy Information Administration. Not only will the new NG pipelines reach new regions in the Americas, but they will also enable export to huge markets in China, Japan and other parts of the world.
Another, negative factor for the unit price of ETP, and other pipeline MLPs, has been the very disruptive and costly protest movements which have, in some cases, halted construction and have been highly discussed in the news media. One of the most costly in terms of delays, as well as perhaps the most reported on, was ETP's Dakota Access pipeline which has now been given the "go-ahead" as the Trump administration took the opposite stance from the Obama administration and cleared the way for finishing the pipeline. While the Dakota pipeline is for transporting oil, the negative implications impacted all pipelines as the environmentalists and Native Americans raised a multitude of legal objections and caused many millions of dollars in delays. On a more positive note, ETP's Rover, $4 billion plus NG pipeline, which runs from PA to Ontario, should be completed this year with no environmental protest delays expected.
ETP is positioned well to benefit as NG production continues to increase. It will play an expanding role in delivering NG within the Americas. Additionally, with more export terminals due to come on line in the coming years (five additional export terminals are scheduled to be up and running by 2020) the world wide demand for LNG will be open to US exporters.
It is clear that while US NG supplies continue to increase dramatically, so are opportunities for both domestic and international markets. Therefore, rather than being a disaster for ETP and other pipelines, the boom in supply, and low prices for NG will prove to be a truly unexpected boon as they deliver a much needed product to an ever expanding international market, and the NG "toll road" will prosper. Virtually no one anticipated this ten years ago, and it appears to me that the markets are still undervaluing the potential which ETP and others have yet to fully achieve.
Other than possible payment from Seeking Alpha, I am not being paid for writing this article by any other source, nor am I connected in any way with ETP or any other MLP other than the fact that I currently have a long term position in ETP and plan to maintain it for the foreseeable future.
Disclosure: I am/we are long ETP, GEL,APLP,NGL.