The big boom in fracking begs the question: how do you play fracking for growth in the stock price and growth in the dividend?
What is Fracking?
Fracking is the relatively new process born in the late 1990s – technically it is called hydrofracking or hyrdraulic fracking or even more technically slickwater hydraulic fracking. Shale formations are cracked open and voila! Oil, natural gas and natural gas liquids come out. And the US has more shale than anyone and the most conservative estimates of reserves than can be exploited – the most conservative I have found – puts the supply at forty years, most people see it as seventy five years or more.
Play the Fracking Boom
How to play this boom besides opening a motel in North Dakota?
First, ignore the obvious plays of companies making this or that for the actual fracking process. These are maxed out and do not generate income anyway. Instead, think about the companies that will benefit by being the middleman between the fields and the refineries, the fields and the consumers. This is where natural gas liquids (NGL) come into play. These liquids are found in unusually large quantities in many shale formations, notably those in the Marcellus shale formation in Ohio, Pennsylvania and New York. The expected volume is already so large the Carlyle Group, arguably the most successful private equity firm in the world, has purchased, is retrofitting and re-opening a shuttered refinery outside of Philadelphia with a market focus on NGL Not all NGL is good stuff – often it has to removed and cleaned up to enable its re-sale or to make the natural gas itself easier to transport.
Here are five names to look at:
Martin Midstream Partners (NASDAQ:MMLP) is an MLP. The company has extensive operations in the Gulf – the destination of a great deal of fracking, with everything coming from Texas, Oklahoma, and North Dakota. The company processes, stores and transports natural gas and NGL – and cleans up so much gunk it opened a Sulfur Services business unit to process and sell for fertilizer sulfur it removes from hydrocarbons. The company is expanding capacity and is sitting right where a great deal more gas is heading over the next one to twenty five years. The current yield is 8.8%.
Suburban Propane Partners (NYSE:SPH) has the infrastructure and markets in place everywhere around the country and as the supply of NGL expands, their business will expand. Second, a great deal of their business is in the northeast not too far from the refinery the Carlyle Group is re-opening outside of Philadelphia. Transportation costs will fall, expanding their margins, and as costs fall I anticipate they will be able to expand the market for propane. How many barbecues are there every weekend? That is not the big opportunity for SBH – many commercial, energy intensive operations such as commercial laundries use propane. The company made an acquisition in 2012 that helped increase shipments of propane from 74.3 gallons to 153.9 gallons in the first quarter of their fiscal year. SPH has the expertise and the financial clout to continue to use acquisitions to grow its business and I believe, over time, increase its dividend. The current yield is 8.1%.
Enerplus (NYSE:ERF) is a Canadian based oil and gas outfit, exploiting traditional fields and hit hard by the decline in natural gas prices, cutting its dividend last year. It also has been very aggressive in the Marcellus Shale formation in Pennsylvania and this investment could begin paying off in 2014 – the play here is all about future production not yet on line. ERF sports a yield of 7% if and when Marcellus hits their operations, the stock and dividend could rise dramatically compared other income stocks.
American Midstream Partners (NYSE:AMID) is a very small outfit that pretty much does, on a smaller scale, what Martin Midstream Partners does – it processes, stores and transports natural gas and NGL. It is relatively unknown and relatively new – the MLP was formed in 2009 – and has a yield of around 10%.
Eagle Rock Partners (NASDAQ:EROC) is also in the natural gas processing, transport and storage business. Unlike other processors, it also exploits and produces form oil and gas fields, giving it more exposure to price fluctuations for those hydrocarbons. Its’ operations are in the heart of oil country – the Texas panhandle. The Permian basis and other oil producing areas of the southwest. The current yield is 9.3%.
Stick to the “secondary” plays on fracking that will move on volume, not the price of gas or oil, and offer GROWTH and INCOME. No need to keep them separate any more.
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