Profiting from the NGL boom
More than oil is gushing for investors today. Here are 2 ways to play natural gas liquids.
By Michael Shulman
For those of you old enough to remember, the theme song from the "Beverly Hillbillies" described oil better than any Wall Street analyst, calling it "black gold, Texas tea." The gold rush and tea harvest is here, as shown by recent production data. Oil output in the U.S. grew 14% in 2012, the single largest year-over-year increase in history, to 8.9 million barrels a day.
These production figures, as well as increases in production of natural gas, obscure another boom -- the boom in natural gas liquids. NGL is liquid stuff that either flows, pretty much on its own, out of a shale field or is mixed with natural gas and is pulled out by companies known as natural gas processors.
There are two ways to play NGL. In the Gulf, where more and more fracked natural gas from Texas and other parts of the Southwest ends up, sits Martin Midstream Partners (MMLP). Martin Midstream cleans up gas, stores it, transports it. The messier that gas is -- fracked natural gas can be quite messy -- the more business for MMLP. And there is a lot to clean up. A couple of years back it started a sulfur business based on all the sulfur it was pulling out of natural gas. The better part of Martin's business is volume-dependent, not price-dependent, making it removed from the natural gas price cycle. As more and more gas and natural gas liquids go through new pipelines and to the Gulf, the more business for MMLP. It's a growth company and a growth stock with a yield of 7.2%.
The other company I like very much is another one Wall Street rarely talks about, Suburban Propane (SPH). You can guess what it does: it distributes propane, an NGL, all over the U.S. with a lot of its business on the East Coast. In Pennsylvania, the Marcellus shale is yielding some of the finest NGL in the world, so much so the Carlyle Group (CG) is investing in a refinery outside of Philadelphia to process it and sell it to companies like Suburban Propane. This will reduce costs, stabilize supplies and give SPH better pricing that will enable it to reach into larger markets looking to use propane to reduce energy costs and pollutions, such as commercial laundries. SPH is a growth company and a growth stock with a yield of 7.3%.
The income sector has been hit hard of late due to rising bond yields and the increased risk premium for holding an income stock. Not so these outfits. These stocks have dipped, not fallen. They are growth stocks that happen to have fat yields and are the front edge of the energy boom in the U.S.
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The idea of US crude being a shelter from turmoil abroad may not be as far fetched as it seems.
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