“When everyone is looking for gold it’s a good time to be in the pick and shovel business,” said Mark Twain. I’ve already covered regional banks in the Marcellus and Bakken shale regions that stand to make money, but now it’s the infrastructure plays. In a nod to Bill Clinton’s strategist James Carville, “It’s the infrastructure, stupid.”
Suddenly, oil and gas MLPs are hot again with the IPO of USA Compression Partners and even an ETF dedicated to the group, the Global X Junior MLP ETF. A Carl Icahn name is expected to IPO shortly as CVR Refining and yield is expected to be over 18%.
According to a Business briefing article in Time’s January 21 issue on how to grow the US economy, the second best way to grow jobs and pump up GDP is to support the shale gas and oil industry. Already, the natural gas and oil boom is responsible for putting 1.7 million people to work. In particular, Dan Yergin, vice-chairman of IHS Cambridge Energy Research Associates, told Time that we need infrastructure (pipelines and production) to move output from North Dakota to the East Coast.
An important white paper by Marc S. Lipschultz for KKR called “Historic Opportunities from the Shale Gas Revolution” emphasized the importance of pipeline infrastructure saying, “Finally, there must be support for, and action to encourage development of a natural gas export infrastructure. In our view, Liquefied Natural Gas (LNG) exports are expected to play an important and constructive role in maximizing the domestic economic benefits of the shale gas revolution.”
The pipeline partnerships
One name to consider is DCP Midstream Partners, LP (NYSE:DPM) , which is a midstream master limited partnership. Its ownership and management is a little complicated so, from the corporate profile: ” DCP Midstream Partners, LP is managed by its general partner, DCP Midstream GP, LLC, which is wholly owned by DCP Midstream, LLC, a joint venture between Spectra Energy Corp. (NYSE:SE) and Phillips 66.” Don’t let the master limited partnership structure scare you off because of the tax paperwork. (Most of their corporate websites offer assistance and/or tips in dealing with the K-1). These are ideal for long term holds in a retirement account.
DCP Midstream gathers, compresses, treats, processes,stores, transports and sells natural gas, NGL and condensate (natural gas liquids), and distributes propane to the wholesale markets. As a master limited partnership it pays a distribution of $2.72 a share for approximately a 6.60% yield. While DCP dropped some 13% in 2012 the company was very optimistic on their Q3 earnings call in November about 5 new cryogenic plants in the Eagle Ford, ” with 760 million a day of processing capacity, approximately 6,000 miles of gathering systems, and 36,000 barrels per day of fractionation capacity.” The P/E is at 33.72 with a PEG of 1.37. Analysts expect five year earnings growth at 16.41%.
Spectra Energy Corp. (NYSE:SE) and Phillips 66 (NYSE:PSX) are not just silent partners, but actively investing $5-7 billion with hopes that DCP Midstream will be worth $15 billion by 2017. That shouldn’t be a stretch as the company enjoyed 2011 revenue of $12.9 billion. DCP Midstream is in that infrastructure pipeline sweet spot that Yergin spoke of as seen in this map from the company website.
Energy Transfer Partners LP (NYSE:ETP) is another midstream pipeline play with 23,500 miles of it. It has a 7.60% distribution yield and a 10.87 P/E. It is also much larger than DCP Midstream. This year it acquired Sunoco and its stake in Sonoco Logistics Partners for a more diversified energy portfolio than its formerly natural gas heavy emphasis.