I live in Pennsylvania. So believe me when I say I have an intimate knowledge of how shale drilling has impacted North America. The Marcellus – which stretches across my home state – and Utica formations provide about 25% of the natural gas used in the U.S.
But there’s more beneath the surface than just natural gas…[ad#Google Adsense 336×280-IA]We’re talking about a powerful ingredient used to manufacture plastics and other everyday products.
Until recently, low demand has kept producers from harvesting it.
They’ve had to leave it in the natural gas stream where it simply burns up.
Now that’s changing.
Petrochemical companies are building new plants on top of the Marcellus and Utica shales just to extract this “byproduct.”
I’ll tell you why in a moment. I’ll also show you how to play the growing demand. First, let’s look at where it comes from…
In Demand and Cheap (But Not for Long)
Early in the development of the Marcellus and Utica shale plays, it became clear that producers would need more gas plants. The volumes of raw gas being extracted were huge.
That’s because wellhead gas contains water, dirt, crude oil and hydrocarbon gas liquids (HGL). Much of these need to be stripped out before you get salable natural gas.
But it’s that last element – HGL – that we’re focusing on today. It’s made up of methane, propane, butane, isobutane, natural gasoline, refinery olefins… and ethane.
Next to methane, ethane is the most common HGL found in raw natural gas. But unlike the other HGLs, each of which supplies its own unique market, there’s never been a huge demand for ethane.
When fracking unlocked our nation’s untapped natural gas supplies, it simultaneously made cheap ethane available.
That spurred the construction of numerous petrochemical plants and export facilities. Ethane production should increase to about 1.5 million barrels per day by the end of 2017.
That’s up 25% from our current production of about 1.2 million bpd.
When those new plants are up and running in 2018, they will increase U.S. ethane demand even further – an estimated 600,000 bpd.
Playing the Ethane Demand
Regular readers know how much I like pipeline master limited partnerships. (I shared three high-yielding MLPs in my last article here.)
My reasoning is simple…
Pipeline MLPs receives revenues based on the volume of what they ship, store, load or unload. They’re virtually unaffected by the price of oil or gas. So when crude prices are wreaking havoc on the sector – and needlessly knocking down MLP shares – it’s a great buying opportunity.
The rout in oil prices recently sent Enterprise Products Partners L.P. (NYSE: EPD) down 11% from its 52-week high (set in July).
The company just put the finishing touches on a big ethane export terminal. Located on the Houston Ship Channel, it will export 1.9 million barrels of ethane per month by the end of 2016.
The first ship to carry ethane from the new terminal arrived last Monday. It will be the first ethane export to leave from a Gulf Coast terminal.
Besides Enterprise’s new ethane facility, I like its quarterly distribution performance. (That’s the amount it pays shareholders, like a dividend.) It recently raised its quarterly distribution by 5.3%. It now pays $0.40 per unit per quarter.
The recent quarterly raise was Enterprise’s 48th in a row. Even when oil was priced at $26 per barrel, Enterprise kept its distribution coverage ratio at a healthy 1.3.
The company has plenty of cash on hand to finance future capital projects. It has a great business model and delivers distribution growth no matter what oil and gas cost.
Enterprise Products Partners is a great play on the ethane boom. And you get to pocket a nice yield while you wait.
Source: Investment U