by Aaron Levitt | February 18, 2014 4:39 am
When it comes to North America’s natural gas stock boom, the keyword for investors is “pressure.” There’s pressure pumping which allows the shale rocks to “fracked” in the first place. Then there’s the high pressure needed to compress that abundant natural gas down into CNG and liquefied natural gas for export and end-use.
Those are the two most common and well-known examples in the energy world.
Yet, what many investors don’t realize is that high pressure plays a big part along the entire natural gas value chain. And the demand for that pressure is only growing as we continue to tap our plentiful shale resources.
Perhaps more importantly, the natural gas stocks providing all of those compression services are some of the biggest dividend yields in the energy patch.
We’re going to look at three stocks with big dividend yields playing on this trend, but first, let’s explore why these nat gas stocks are booming with income potential.
High pressure is a huge part of how we produce energy in the United States, and the natural gas stocks that provide that compression are seeing their stars shine across the up-, mid- and downstream sectors of the market.
The problem is pretty simple.
Natural gas molecules expand outward to fill their surroundings. Unfortunately, that poses a big problem for many natural gas companies across the entire production chain.
When a well is tapped, the underlying reservoirs are under immense, naturally occurring compression. That helps push the natural gas upward through the well and into the midstream infrastructure. Over time, as the natural gas dissipates, that pressure is reduced. To keep the flow going, natural gas companies need to use an assortment of compression equipment.
Likewise, as natural gas travels through a pipeline and gathering system, pressure dissipates over long distances. There again, midstream operators need compression gear to keep the natural gas flowing properly. These compressors also are needed to pull natural gas in and out of underground storage facilities. Finally, upstream natural gas stocks need to use the various compressors to process natural gas liquids from the raw-gas stream.
All in all, as we continue to tap our natural gas resources, demand for these compression services will continue to grow. In fact, tapping our unconventional shale formations in North America will require more than three times (PDF) the amount of current capacity. That’s more than 300,000 horsepower of compression across all segments of the natural gas market.
That fact is producing some serious coin for the natural gas stocks that provide these pressure services … and in turn, some serious dividend yields for investors.
Here are three of the natural gas stocks that can transform the high pressure into high dividend yield:
Dividend Yield: 7.3%
When it comes to a pressurized play, Exterran Partners, LP (EXLP) could be investor’s first stop. This company is the largest provider of compression services in the United States at more than 2.4 million horsepower worth of capacity. That capacity seems to moving across the world, as EXLP continues to rack-up contracts with various national oil companies and super-majors.
Exterran’s compression products can now be found in faraway natural gas markets like Nigeria and Brazil.
The key for investors is that EXLP is a master limited partnership subsidiary of Exterran Holdings (EXH). That relationship helps plenty of juicy dropdown transactions designed to boost EXLP’s cash flows to unitholders and its parent. Since going public in 2006, EXLP has used this to its advantage and has boosted its quarterly payouts to investors by 33% since its first distribution in 2007. The latest bump came at the end of January.
EXLP stock now yields an impressive 7.3%.
Dividend Yield: 7.2%
While EXLP has its hands across the entire natural gas value chain, USA Compression Partners, LP (USAC) generally focuses on midstream applications. Over 90% of USAC’s generated horsepower is used in large‑volume gathering systems, processing facilities and pipeline applications. The bulk of those compressors are located in natural gas hotbeds like the Marcellus, Fayetteville and Haynesville shales.
That focus on midstream compression provides USAC stock with more stable revenues as its pumps are generally leased out for long-term contracts to pipeline owners — roughly two to five years. Additionally, many of those contracts continually get re-upped as you generally don’t pick up and move pipeline to another location. Also helping is USAC’s young fleet of high horsepower compression units. Those command higher rents from midstream firms.
All in all, that stability has helped USAC stock continually boost its distribution. The latest was a 4% increase vs. the previous quarter. USAC yields a hefty 7.2% as of its last quarterly payout.
Dividend Yield: 8.2%
If USAC can be seen as a play on the safer end of the compression market, then Compressco Partners, LP (GSJK) can be used as a play on the risky side. GSJK focuses almost exclusively on the upstream market for natural gas. That means its smaller-horsepower pumps are subject to whims of actual natural gas exploration efforts.
So goes production from a single well, so goes GSJK’s earnings. Of course, that risk is mitigated by a high yield of more than 8%.
However, GSJK does have a nice ace up its sleeve — providing specialized compression equipment designed to improve flows in mature and dying fields. As we all know, many mature and legacy (read: “easy”) sources of energy are quickly drying up. By using GSJK’s products, E&P firms are able to squeeze out more production from the wells and improve their lifespan. Over the longer term, that should bolster GSJK’s cash flows and strengthen its dividend.
The bottom line for investors: There’s big money and dividend yield to be had if you put your natural gas holdings under some pressure.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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