The shale gas revolution has brought a new life in many sectors that were otherwise neglected by investors. Energy infrastructure companies were one such group. Given the abundant supply of natural gas, economists have suggested the government export some of it, which will not only bring foreign remittances but also help to maintain a balance between supply and demand of natural gas. When it comes to energy infrastructure companies and the shale gas boom, five areas of development are brought under discussion:
- Gas processing – a process through which natural gas liquids (NGLs) are separated from natural gas.
- Fractionation – it is a process through which mixed NGLs like ethane, butane and propane, are separated into distinct products (and therefore brought into usable condition)
- Petrochemical – abundant gas supply means cheap NGL supply and therefore cheap availability of ethane. Ethane is used to produce ethylene, which is then used as a cheaper substitute to naphtha and propane, thereby providing cheap feedstock to the companies.
- LNG exports – building terminals/pipelines to export LNG
- Gas power – basic infrastructure is needed to enable companies to use natural gas rather than costly alternatives like coal for energy production.
Now that we have a brief idea of the role of energy infrastructure stocks, it is important to shortlist the main beneficiaries:
KBR, Inc. (NYSE:KBR)
The resurgence of energy infrastructure spend in NA becomes an investable theme in 2013, reflecting potential for a massive amount of spend across petrochemicals, Gas-to-Liquids (GTL), LNG, and gas pipelines. Industry margins are expected to continue to improve this year, reflecting better utilization and perhaps tighter capacity with North America now in the mix. KBR seems to be one of the main beneficiaries of the shale revolution given that it has been able to win the majority of the projects related to energy infrastructure development in all five fields mentioned above.
KBR’s stock has pulled back on credibility issues after recent charges taken on problem projects. The credibility issue should not be ignored, but still this company is unavoidable in the Engineering & Construction (E&C) group. KBR remains very well positioned to win GTL, LNG, ammonia and petrochemical work in North America, and the expectations on the stock cannot get much worse.
Flour Corporation (NEW) (NYSE:FLR)
As one of the higher quality names in the E&C space, FLR is best positioned to benefit from North American energy spend similar to the 2005-2008 cycle given exceptional customer relationships. Also, the mining discount will go away as oil & gas comprises a larger portion of the backlog. The mix of work towards areas like petrochemical and GTL should be favorable to overall margins as well.