by Aaron Levitt | April 16, 2014 9:34 am
Once again, the widespread adoption of fracking has completely changed the dynamic of the energy market in the United States. And this time we’re not talking about the sheer volume of oil being produced in fields like the Eagle Ford or Bakken shale.
No, fracking has had its way with plenty of other energy commodities. And this time, we’re talking about liquefied petroleum gas (LPG) and propane.
For most Americans propane is often overlooked except when we fire-up our grills — although 14 million households do use it as a cooking/heating medium. Globally, it’s a pretty big commodity, finding its way as chemical feedstock, transportation fuel as well as into off-the-grid refrigeration. And as one of the few things that energy firms are a lowed to export, the U.S. is quickly becoming a major supplier of LPG and propane to the world.
According to energy think-tank FACTS Global Energy, exports of LPG could roughly triple by 2020, reaching 635,000 to 795,000 barrels per day. That means energy stocks that have a heavy presence in propane are some of the best stocks to buy right now.
All in all, that’ll boost prices for propane and LPG here at home. Luckily for those who use propane to fuel their homes — or for investors just looking to cash in — there are plenty of ways to play the surge in LPG/propane exports. Here are four of the best energy stocks to buy.
It seemed like the story at refiner Phillips 66 (PSX) couldn’t get any better … until PSX went ahead and made a major deal with China’s Sinopec (SNP). Starting in 2016, PSX will now supply the chemical firm with around 34,000 barrels per day (bpd) of LPG — worth around $850 million at current prices for the fuel. PSX was already one of the best stocks to buy, but the SNP deal only makes it better.
China’s total LPG imports could reach half a million bpd by 2020 as the nation begins using the fuel as a feedstock for ethylene and chemicals production. Even with export costs, LPG is still cheaper than using traditional feedstock naphtha, which is derived from oil. And with many major Chinese chemical firms looking into building new LPG-fueled crackers, PSX could be the major driver when it comes to filling that need.
The deal is currently only a slight fraction of revenues for PSX stock. However, it could pave the way for similar deals with other Chinese manufacturers. CNOOC (CEO) is also considering using LPG for a new million ton-per-year ethylene cracker. Over time, PSX stock should see an incremental increase in its revenues tied to LPG exports.
That makes PSX stock — currently trading for a 30% discount to the S&P 500 when looking at P/E ratios — one of the best stocks to buy today.
While the midstream energy master limited partnership (MLP) Enterprise Products Partners (EPD) has assets spanning the entire fossil fuel realm, it’s one of the best stocks to buy as an LPG play. EPD is currently the largest producer of propane in the country.
Currently, EPD has natural gas liquids fractionating capacity of around 670 million barrels per day at its Mont Belvieu, Texas, complex. While most of that propane/butane is consumed here at home, Enterprise does export a small — but growing part — of that as LPG. Its various terminals currently have the capacity to 250 million barrels per year.
However, the firm isn’t resting on its laurels. EPD has recently undergone some refrigeration capacity upgrades at its Houston Ship Channel LPG export facility. Those upgrades will increase its capacity to load propane by an additional 1.5 million barrels.
That expanded capacity will lead to higher margins as prices for propane and LPG rise due to exports. Already, EPD has an industry-high gross profit margin of 7% on its midstream operations. Those margins and strong cash flows have helped the MLP recently raise its dividend as well. Shares of EPD stock now yield nearly 4%, making it an easy choice for our list of the best energy stocks to buy.
With a ticker like NGLS, there’s no mistaking what midstream firm Targa Resources Partners LP (NGLS) does for a living. And like the previously mentioned EPD, Targa is quickly becoming one of the best stocks to buy thanks to its LPG exports.
NGLS is already a big player when it comes to natural gas liquids and processing capacity at its facilities in the Gulf. However, sensing the opportunity, Targa is currently undergoing expansion projects to increase its exports of LPG. Construction started on a $480 million project back during the end of 2012. Phase 1 of the project expanded its export capacity to approximately 3.5 to 4 million barrels per month of LPG. Phase 2 — which will be completed by the third quarter of this year — will add an additional 2 million barrels per month worth of export capacity, or about 72 million barrels per year.
That project — along with the fact that NGLS doesn’t hedge propane and butane production — will allow it boost its margins and profits even further as prices for propane and LPG continue to rise on the backs of increasing exports.
NGLS has been one of the better stocks to buy for a while — shares have already gained about 30% over the last 52 weeks. However, that could just a beginning as the firm ramps up its LPG capacity.
EDITOR’S NOTE: Updated to clarify LPG figures.
Unfortunately, rising exports of LPG and propane mean that there will less supply of the fuel here at home. That means Americans will be faced with higher prices. This past winter, domestic propane prices surged by more than 200% as exports have risen.
While AmeriGas Partners (APU) doesn’t actually export LPG overseas, it is the largest supplier of propane in the United States — reaching nearly 2 million residential and industrial customers. That makes it an easy selection for our list of energy stocks to buy.
Its size and scope have made it possible for APU to pass on incremental prices increases to its customers. Propane distributors often have virtual monopolies in the towns they operate in and own the tanks/equipment attached to people’s homes. Switching costs for consumers are very high.
As such, AmeriGas has a gross profit margin of nearly 44%.
That margin produces some steady and hefty cash flows at the MLP. It also results in a high dividend yield of 7.7%. All in all, APU is one of the best stocks to buy if you want to play rising domestic prices for propane.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2014/04/stocks-to-buy-lpg-ngls-epd-psx-apu/
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