Energy production has been growing rapidly in recent years, even through uneven growth for the overall economy. North Dakota has become the fastest growing state for energy, primarily due to gas and oil. Oil production began in 1951. By 1979, monthly production rose to 2½ million barrels (83,000 barrels per day) and remained pretty much the same through 2005. In the last six years, monthly production exploded to a record 15.3 million barrels in November 2011. That's equivalent to 510,000 barrels per day (up 150,000 over the prior year), more than Ecuador (the smallest member in OPEC) and now accounts for 10% of U.S. production. Next year it expects to become the No. 2 state (behind Texas) for petroleum production.
Recent growth comes from new technology, including hydraulic fracturing, which uses pressurized fluid and sand to break open oil-bearing rock two miles underground (largely in western North Dakota). Oil produced in North Dakota displaces imports from Middle East or Latin American countries, a national priority. The U.S. Geological Survey in 2008 estimated there were 3.0-4.3 billion barrels of oil in the Bakken formation, part of which lies in North Dakota.
Oil is presented first because most investors relate to it better than gas. But gas has the potential to supply more energy at the national level. With the advent of shale fracking technology and the discovery of massive shale plays in the U.S. (including North Dakota), the nation's supply of natural gas far exceeds current demand which has caused the price of gas to fall drastically over the last few years. The abundance and proximity of the resource suggests that the price of gas will be less volatile than oil and remain low for some time. Increased natural gas utilization is forecast for power generation as operators switch from coal to gas to take advantage of favorable natural gas pricing caused by abundant natural gas supplies. Older coal-fired facilities are being replaced with gas facilities which burns cleaner than oil and coal, producing fewer greenhouse gases. Natural gas increasingly will become the fuel of choice.
Increasing energy production from shale adds to MLP investments. Most move gas and oil around the U.S. and Canada. These MLPs have been adding to their pipelines and building more terminals for storage for gas and oil from traditional sources. But the boom in obtaining energy from shale formations gives them additional investment opportunities and it's difficult to imagine economic forces which will prevent future growth. Four of my favorites are discussed below:
Boardwalk Pipeline (BWP) supplies gas and stores energy products. In addition to conventional sources, its pipelines are located near many unconventional natural gas supply sources including the Haynesville Shale, Eagle Ford Shale, Barnett Shale, Bossier Sands, Fayetteville Shale and Caney Woodford Shale. BWP serves 45 power generation facilities and its general Partner is Loews (L). BWP yields 7.7%.
Enbridge Energy (EEP and EEQ) is expanding its Berthold rail terminal capacity in Bakken shale 80,000 b/d and already has contractual commitments for 70% of its capacity. The $145 million project complements its Bakken Expansion Program, integrating gathering pipeline capacity in western North Dakota and eastern Montana with increased North Dakota capacity. This follows a $90 million expansion of the Bakken Access Program, announced three months ago, for pipelines and storage tanks in western North Dakota to supply the Bakken Expansion. Its general partner is Enbridge Inc (ENB), a leading Canadian energy company, with 26% ownership. EEP yields 6.5% and EEQ has an implied yield of 6.2%.
Enterprise Products Partners (EPD) just announced 10-year transportation agreements for the Rocky Mountain expansion project for 82,500 barrels per day. The project is 263 miles of 16-inch diameter pipeline as well as pump station modifications. The capacity is designed for growing natural gas and natural gas liquids (NGL) production from major basins in Utah, Colorado, Wyoming and New Mexico. New natural gas processing plants are scheduled to begin service in late 2014. EPD is currently the largest MLP with 50,000 miles of pipelines, 192 million barrels of storage capacity and 8 billion cubic feet of natural gas storage capacity. EPD yields 5.2%.
Kinder Morgan Inc. (KMI) will acquire El Paso Corp (EP) by Q2. Its MLPs, Kinder Morgan Partners (KMP) and Kinder Morgan Management KMR), have roughly 23,000 miles of natural gas pipelines and EP has more than 43,000 miles of pipelines. The majority of KMP pipelines are in Texas and the Midwest, while EP pipelines stretch through the Southwest, Southeast, Mid-Atlantic and Northeast. One major benefit is that KMP will broaden its ability to transport gas from some of the largest shale plays in the country - Marcellus, Utica and Barnett shales - to areas where natural gas-fired generation is in high demand in California and Florida markets. KMP yields 5.6% and KMR has an implied yield of 6.1%.
MLP businesses, building infrastructure for moving energy products, have been strong. Rapidly expanding investments in extracting gas and oil from shale deposits and other areas which had been uneconomical are adding to investment opportunities. Financing has not been a problem for MLPs. Even during the financial meltdown three years ago, MLPs were able to obtain financing. While MLPs are generally thought of as yield securities with tax advantages, growth has been excellent at a time when it has been ragged for many industrial companies. The future for MLPs with growth and high yields has never looked brighter.
Disclosure: I am long EEQ.
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