A Unique Shale Gale Play for 2017

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Oil & Gas

A lot can change in a decade…

Case in point, over the last 10 years, the U.S. has gone from being one of the largest users of natural gas to one of the largest producers.

And Cheniere Energy Inc. (NYSE: LNG) has transformed itself from an importer of liquefied natural gas, or LNG, to a world-class exporter of LNG.

But Cheniere isn’t the only company profiting from the boom in natural gas.

There are some great opportunities ahead for investors. You just need to know where to look.

Before I get into that, it’s important to understand what the future holds for natural gas and LNG.

The Shale Gale Forecast

Right now, the U.S. exports a little more than 1 billion cubic feet per day (Bcf/d) of LNG. By 2030, U.S. exports could hit 15.5 Bcf/d. That would make the U.S. the largest LNG exporter in the world.

U.S. LNG exports are rapidly ramping up as Cheniere’s capacity came online last year.

However, the LNG export market still makes up a small percentage (1.4%) of the overall production of natural gas. But by 2030, 15.5 Bcf/d would represent more than 20% of our daily gas consumption according to the EIA.

The great thing about the U.S. natural gas market is that exploration and production (E&P) companies can react rapidly to changes in the market. That is a big factor in terms of future prices.

Over the next several years, they should remain in the range of $3.50 to $4.50 per million British thermal units (MMBtu).

Besides increasing LNG exports, several factors could cause natural gas prices to rise.

One of the biggest factors is the U.S.’s LNG exports to Mexico. Currently, U.S. natural gas exports to Mexico are about 1 Bcf/d.

However, as industrial activity increases there, exports could hit 8 Bcf/d. A lot will depend on what happens with Trump’s proposed U.S. border import tax.

In spite of the potential increases coming from increased LNG and Mexican exports, U.S. E&P companies have plenty of supplies. This should keep long-term (five to 10 years) prices from exceeding $7.00 per MMBtu.

The EIA expects short-term production to grow from 72 Bcf/d last year to nearly 78 Bcf/d in 2018. And producers are already reacting.

According to Baker Hughes’ latest rig forecast, there are 146 rigs drilling for natural gas in the U.S. This compares to just 97 a year ago.

There’s a flood of natural gas hitting the market…

And the oil and gas industry’s current infrastructure is struggling to keep up.

A Profitable Solution

Having enough pipeline and processing plant infrastructure has always been a problem with the oil and gas industry.

As production grows, the pipeline network and the number of natural gas processing plants have to grow along with it. But pipeline and processing plant permitting and construction take time.

It’s a lot slower than drilling and completing a new well.

This is good news for investors, as natural gas pipeline and processing companies are in hot demand.

A great example is MPLX L.P. (NYSE: MPLX). This is a natural gas-focused master limited partnership (MLP).

MPLX gathers, processes and moves natural gas from the wellhead to major transmission lines. It then goes to customers like Cheniere.

Its main area of operation is the Utica and Marcellus shales. It’s a fantastic growth and income play on the natural gas market.

Over the last year, its unit price has increased more than 58%. As if this weren’t good enough, it pays a handsome distribution yield of 5.59%.

Here’s the bottom line: Even though natural gas prices aren’t going to increase all that much, companies like MPLX L.P. will continue to greatly outperform the market.

Remember, pipeline MLPs are paid on the volume of product that passes through their pipelines, not the price of it. As natural gas volumes surge over the next decade, so will the unit prices and profits of MLPs like MPLX.

Good investing,

Dave