The best way to profit from surging US oil

The government just opened the door for the export of this key resource for the first time in nearly 40 years.

By StreetAuthority Jul 8, 2014 2:29PM

Image: Oil drums © Kevin Phillips, Digital Vision, age fotostockBy Chuck Marvin, StreetAuthority


If you haven't heard, America is up to its ears in domestically produced crude oil and natural gas liquids -- thanks to the shale boom.


This is good news for supporters of American energy independence. Oil imports have fallen 24.6 percent since 2006, from a high of 10.1 million barrels a day to 7.6 million barrels a day last year, according to the U.S. Energy Information Administration.


At that pace, the U.S. could become a net oil exporter by 2020.


Unfortunately for upstream oil and gas producers, there aren't many buyers for all the new crude oil and natural gas liquids (NGLs) coming out of the ground.


The entrenched Gulf of Mexico refineries were engineered decades ago to process heavy, high-sulfur crude oil from Venezuela, Saudi Arabia, Alaska's North Slope, and the deepwater Gulf of Mexico. These refineries cannot process much of the light, low-sulfur stuff now coming from U.S. shale reservoirs.


Today, there is a glut of crude oil and other liquid hydrocarbons at tank farms in Texas, Oklahoma and other major supply hubs.


One type of liquid hydrocarbons with which U.S. inventories are particularly oversupplied is gas condensate. Condensate is an oil-like substance that morphs from a gas into a liquid when atmospheric pressure drops, as when gas rushes out of the wellhead -- or when it flows through a natural gas processing plant.


The basic laws of supply and demand suggest that oil producers would be better off selling lighter crude oils and NGLs to buyers in Europe, Asia and Canada, where refineries are better equipped to handle the light crude blends.


Until last month, federal law prohibited U.S. oil and gas companies from exporting raw crude oil and condensate to foreign markets, The export ban was established after the Arab oil embargo in the 1970s, a time when U.S. domestic oil production was in steep decline.


However, news broke late last month that the U.S. Commerce Department awarded licenses to export condensate to Enterprise Products Partners (EPD) and Pioneer Natural Resources (PXD). The announcement signals that the Obama administration is preparing to test the controversial waters surrounding the exportation of the U.S.' homegrown energy resources for the first time in nearly 40 years.


Enterprise is the standard-bearer in the NGL processing and transportation business. It is a master limited partnership (MLP) with a market cap of $69 billion. Its asset base extends into every major U.S. shale basin and includes 51,000 miles of pipelines, 200 million barrels of liquid storage capacity, 24 natural gas processing plants, and 22 NGL fractionators. Its core assets make it a strong competitor to Kinder Morgan (KMI) in the large-cap oil and gas transportation segment.


Shares of EPD have gained about 25 percent over the past year. The company paid out $2.78 per unit in distributions in that time, good for a 3.7 percen percent yield. Distributions have grown steadily at 6% a quarter.


However, Targa Resources is perhaps a more compelling option for investors seeking exposure to natural gas liquids. It is a younger, leaner company poised to compete strongly with Enterprise in the NGL space.


Targa actually comprises two public companies: Targa Resource Partners (NGLS), a $7.9 billion MLP, and $5.3 billion Targa Resources Corp. (TRGP), which acts as the general partner. The MLP owns and operates Targa's portfolio of assets and pays up to 48 percent of its distributable cash to the general partner in the form of IDRs (incentive distribution rights).


Targa is building out a network of assets the span the NGL value chain, from gathering and processing to storage and marketing. It operates 11,300 miles of natural gas pipelines, 10 processing plants, railcars, pressurized NGL barges, and other related equipment. The second-largest operator at the NGL hub at Mont Belvieu, Texas, Targa also operates its own export facility at the Galena Park marine terminal near Houston.


Targa is wrapping up a $2.2 billion capital spending program for 2013 and 2014. The program includes $1 billion to expand its upstream gathering and processing system, and $1.1 billion to expand its downstream business segment.


This spending should result in greater NGL throughput capacity in this year's third quarter. Gas-gathering capacity is expected to expand from 900 million cubic feet (MMcf) a day at the end of 2013 to 1,340 MMcf a day at the end of this year. NGL export capacity is projected to expand from 4 million barrels per month to 6 million barrels over the same time period.


NGLS has gained better than 30 percent over the past 12 months. The MLP paid $2.95 per unit in distributions over the past four quarters for an average yield of 5.1 percent. Distributions grew 9.3 percent over the past four quarters.


Meanwhile, shares of TRGP have climbed more than 110 percent over the past year. TRGP pays a quarterly dividend of $2.357, representing a dividend yield of 2.4 percent and up 41 percent over the past four quarters.


Risks to consider: IDR fee structures are under the microscope as a result of ongoing organizational challenges at Kinder Morgan, a competitor of both Enterprise and Targa.


Further criticism of IDRs could pose challenges for Targa Resources, regardless of the company's growth opportunities with its NGL processing assets.


Actions to take: Buy Targa Resources ahead of its capacity expansion. Investors seeking a long-term tax shelter should buy and hold units of NGLS; short-term investors and IRA investors should purchase shares of TRGP. My three-month price targets are $77 for NGLS (a 7 percent gain) and $150 for TRGP (a 6 percent gain).

27Comments
Jul 8, 2014 7:13PM
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The best way for Americans to profit here, would be to build some state of the art new Natural Gas Power Plants. This would create thousands of new jobs and produce cleaner cheaper energy boosting profits for American manufacturers and by making our companies more competitive this will also increase foreign investment keeping jobs here.
Jul 8, 2014 10:29PM
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Every desease imaginable is crossing our borders now.  Foot & Mouth, TB, etc.  Americans are catching them.   Our problem sits in the white house.
Jul 8, 2014 7:42PM
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All this is balony when the supply and demand is greatly influenced by an illegal Arab cartel.

If supply and demand was working oil would now be cheap, it isn't.

Jul 8, 2014 10:06PM
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Yeah, let's export this crap. Start preaching supply and demand crap and raises gas and oil prices to the moon.  Americans are already killing themselves because they can no longer provide for their families or even expect to EVER have anything in this country. Why don't we just go ahead and finish this country off by exporting.  Sounds right to me.
Jul 9, 2014 9:25AM
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Hummm The only Glut is See is in Congress..
Jul 9, 2014 12:33PM
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So who's building the refineries we need to process all this oil we're producing?
Jul 8, 2014 7:10PM
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Protectionism never helps an economy, only hinders it. Economists have known this for 250 years but the average person has still never learned it.

Jul 9, 2014 1:03PM
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There hasn't been a new refinery built in this county for decades - why?because it would be a legal fight for years before a shovel of dirt was moved. New refineries would be a win-win to get the ageing and dangerous facilities decommissioned. But you cant get the "greenies" to see that our oil and gas should be kept here for our use for new power plants, cleaner fuel end use and so on. OUR energy sources would be a great boost to manufacturing and industrial plants (those that have survived anyway) and would be another cog in the much needed infrastructure improvements America needs.
Jul 8, 2014 10:27PM
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The best way to profit from the surge in oil production and use is to implant a card skimmer in the pumps at your local gas stations. 
Jul 9, 2014 2:03PM
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A lot of good information in the Article, but it is still illegal to export "crude oil" per se, and that is a misnomer here...That law has not been changed as far as I know...?

Partial distillations of certain products and condensates are NOT crude oil...

Jul 9, 2014 1:53PM
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A lot of Refineries have had several upgrades; So they can process different products...:

And also have increased production capabilities...


Some new facilities are being built to "partially process" oil or light distillates or condensates...

This is being done, to be able to export or "export more" under existing export laws of oil and other products....The Government or FTC (maybe other entities) clarified some of the "export rules and regs."....Still as in the past, Crude Oil is "not allowed to be exported".


But we have a "glut of certain products", not enough storage, and a shortage of transporting vehicles such as, rails, trucks and pipelines...Too much to take to refineries and not enough capacity in some cases...Storage is a problem also and this extra stuff will be added more to exports.


True, that most refineries take about 10 years to come on line to full production, that is if there are not extra hoops to jump through, lawsuits, etc, etc.

And none have been built for 2-3 decades....More have been closed in the last 40 years, than any being built..

These newer "quickie" disiliation(sp) towers or other apparatus' are much easier to erect or put in place and process these products...Think they can be done in months or a year or so..??

A lot is being written about this on other sites,

But don't look for it to drop prices at the pumps anytime soon...But shouldn't raise them either.

All just opinions, and there is much more available research on the subject matter...

Yes, long in Oil E/P, Refiners, and pipelines and rail.  

 

Jul 9, 2014 11:40AM
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"The best way to profit from surging Oil" and other energy products; Is to be invested in them...


Now that you have gotten your investment or financial advice for the day...LET'S MOVE ON..


As far as Obama, he has been the Best President for Energy in Decades.

But seems many don't realize that?...IMO.

As far as the "pump prices", he has NOTHING to do with that...

Blame the Retailers, the Dealer groups and manipulators and scumbags on the Trading floors.

If you don't see that, you really shouldn't be allowed to drive either.

Jul 9, 2014 11:45AM
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The BEST WAY for the AMERICAN PEOPLE to PROFIT from the OIL SURGE is to NOT USE ANY GASOLINE that is COSTING the AMERICAN PEOPLE and the world a FORTUNE because of the DAMAGING & DIRE CLIMATE CHANGE, not to mention POVERTY because of the corrupt Republican FINANCIAL & OIL corporate MONARCHY'S OUT OF CONTROL, UNCONTROLLED CRIMINAL CAPITALISTIC CORRUPTION & GREED !!
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