Our Favorite 'Back-Door' Play On The American Energy Boom

Jimmy Butts's picture

Wednesday, May 21, 2014 - 1:00pm

by Jimmy Butts

It's not too late to make a lot of money from the American Energy Boom. If we're right, the chance to earn blockbuster gains investing in this incredible story has only just begun.

Here's what you need to know...

The American Energy Boom hardly needs an introduction. Most people are aware that due to technologies like horizontal drilling and hydraulic fracturing, the United States is now awash with new sources of oil and natural gas. These developments have made America the largest producer of energy in the world.

As you'd imagine, a lot of money can be been made investing alongside this trend...

For example, EOG Resources Inc. (NYSE: ROG) is up 292% since 2009.... Continental Resources (NYSE: CLR) has soared over 800%... and Rex Energy (NYSE: REXX) has returned a staggering 1,200% over the same period. All of these companies were among the first major players in the American Energy Boom.

The problem is that it's becoming harder and harder to find prospects like these in the exploration and production space. This story has been going on for over five years and by this point there simply aren't many good buys left. As a testament to my point, EOG Resources, Continental Resources, and Rex Energy all currently trade at price-to-earnings ratios in excess of 23 up to as high as 109.

However, there is one part of this story that hasn't gotten much press. It's still too early in the development phase for most mainstream investors to catch on. But in a few years that could change. In fact, we're convinced that this opportunity undoubtedly offers investors the greatest chance of reaping big gains from the American Energy Boom.

I'm talking about the revolution in natural gas liquids, or NGLs...

Natural gas liquids -- not to be confused with liquefied natural gas -- are byproducts produced during the production of natural gas. These hydrocarbons are lighter than oil and they're often used to create petroleum products like ethane, propane and butane.

Dave Forest, StreetAuthority's resident commodities expert, talked about NGLs in his most recent issue of Scarcity & Real Wealth...

NGLs have become a common target for U.S. drillers over the past few years. With natural gas prices down, these "kickers" add value to gas wells by providing additional revenue.

Because of this, U.S. output of NGLs has grown dramatically. As the chart below from the EIA shows, since 2009 total production has jumped by over 50% -- the first significant increase in decades.

He goes on to explain the investment opportunity in the NGL space...

If you were trying to guess how best to invest in the U.S. NGLs boom, your first choice would probably be the producers -- the oil and gas firms that are pumping out these commodities in ever-increasing volumes.

But in fact, that hasn't been the prime play on this market because of one factor -- prices.

Rapidly rising NGLs output in the United States has had a crushing effect on supply and demand in the domestic market.

Take an NGL like ethane. The substance is used primarily in making feedstock that goes into manufacturing plastic. There's a decent-size market for it in the United States -- primarily on the Gulf Coast -- with current consumption estimated at around a million barrels per day.

But today, U.S. ethane producers are pumping out around 1.2 million barrels per day. So there just isn't anywhere to sell the stuff. That has caused prices to fall by 66% over the past two years, averaging $0.26 per gallon in 2013 as compared with $0.77 in 2011. Plans are in the works to build a raft of new ethane-fed chemical facilities -- but the bulk of these won't come online until at least 2017.

In the meantime, NGLs producers are making slim profits.

So, how then do we profit from America's soaring NGLs production? With a group of companies that use the opposite strategy to the producers.

These are NGLs exporters, firms that are taking advantage of the fact that U.S. NGLs prices have fallen so dramatically on oversupply.

You see, low prices for NGLs in the U.S. are actually making these supplies a sought-after item. Petrochemical companies in Europe and Asia have been using this opportunity to secure cheap supply -- in the form of exports from the Gulf Coast.

Driven by growing demand abroad, U.S. shipments of NGLs have been booming. The chart below shows how shipments of propane have grown by as much as 300% since late 2011.

All indicators are that this trend will continue. U.S. NGLs prices are simply so low that the United States today represents one of the most attractive suppliers on the planet of these basic goods.

Companies involved with the exportation of NGLs are already seeing booming results due to this new  trend, too. For example, Oiltanking Partners (NYSE: OILT) -- a Houston based Master Limited Partnership -- has surged over 50% since January thanks to the company's booming NGL exports. All told, OILT's revenue from NGL exportation has more than doubled in the last few years.

Unfortunately, according to Dave it's a little too late to buy into the OILT story. The big money has already been made here.

But the good news is Dave thinks he's found another stock, just like OILT, that he believes gives investors an equally high-potential opportunity to profit from the rise in NGL exports.

This company could be on the verge of a similar breakout as investors realize the profit potential being unlocked through its NGLs business, especially given that it's one of only a handful of firms that's positioned to export large and increasing volumes of NGLs via its strategically located facilities on the Gulf Coast.

The stock just turned in one of the best quarters in its history, and yet it trades at one of the lowest multiples of any firm in the business. By buying it now, Dave thinks this stock offers strong growth prospects at a great price, making it the perfect way to play the NGL mega-trend -- before the wider public realizes the potential. (To be fair to our Scarcity & Real Wealth readers, we can't give the pick away here, but you can learn how to gain access to it here.)

The bottom line is that the NGL story is one that is barely registering on the average investor's radar right now. But if you look closely, it's not difficult to understand the potential of the companies involved in this business. And as the story of the American Energy Boom continues to develop, it could be the best way for investors to make money on this trend.

P.S. -- There's incredible opportunity to reap huge gains from the oil and gas sector and Dave is showing readers the best ways to profit. In fact, in his latest report, he talks about a 68-year-old disruptive energy technology that could end OPEC as we know it. In this eye-opening report, you'll learn about an energy company that's producing a little-known fuel and selling it for an incredible 572% profit margin. That can only mean good things for the stock. To learn more about this company and how to get this free report along with your subscription to Scarcity & Real Wealth, follow this link.

 

Jimmy Butts does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of OILT in one or more of its “real money” portfolios.