The Lucrative Business of Oil and Gas Storage
Thursday, June 20th, 2013
By Mitchell Clark, B.Comm. for Profit Confidential
The spot price of natural gas remains subdued, but oil prices keep nudging toward the $100.00 level for West Texas Intermediate (WTI).
But in spite of the lack of conviction in spot energy prices, there continues to be good money in oil and gas stocks.
Countless oil companies have been doing very well on the stock market, and there is excitement within the industry that the oil and gas build-out, including the shipment of liquefied natural gas (or LNG, which is about 1/600 the volume of natural gas), is in a sustained period of economic growth.
Under the umbrella of the oil and gas industry, there are a myriad of growth stories in energy transportation and storage.
One recently listed company experiencing solid success is EQT Midstream Partners, LP (EQM), a limited partnership generating solid quarterly income and 59.4% owned by EQT Corporation (EQT) out of Pittsburg, Pennsylvania. EQT Midstream Services, LLC is the company’s general partner.
EQT Midstream Partners closed its initial public offering (IPO) on July 2, 2012 selling 14.4 million common units to acquire and develop midstream assets in the Appalachian Basin, across 22 counties in Pennsylvania and West Virginia.
EQT Midstream Partners is in the natural gas transmission and storage business, with approximately 2,000 miles of regulated, low-pressure gathering lines. Virtually all of the company’s revenues are generated under interruptible gathering service contracts.
For an old economy energy company, EQT Midstream Partners is generating significant growth. First-quarter revenues for 2013 were $44.4 million, up from $31.0 million generated in the first quarter of 2012. Earnings were $22.2 million, doubling earnings of $11.1 million in the comparable quarter.
The company’s stock market performance has been no less impressive than a burgeoning technology stock. At the beginning of the year, the position was approximately $30.00; now, EQT Midstream Partners is trading at $50.00 and yielding three percent.
- Since the beginning of July through to Friday, the small-cap Russell 2000 Index has tumbled 8%.
Historically, the Russell 2000 has led the general market lower.
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The company’s one-year stock chart is featured below:
Chart courtesy of www.StockCharts.com
As mentioned, oil prices are edging higher, but the price of natural gas remains subdued. Yet countless oil and gas stocks are doing great on the stock market.
A company like EQT Midstream Partners or other limited partnership companies whose purpose is to generate income for shareholders are welcome additions to long-term equity market portfolios. If EQT Midstream Partners is doing well with natural gas prices being where they are today, imagine how well the business will develop when prices rise.
One of the big risks with this type of infrastructure investment is management. If a company’s management decides to get bold and borrow a lot of money to expand, your risk as a unit-holder goes up significantly.
Exposure to the oil and gas industry has been, and should continue to be, a profitable sector for investors. I really like the transmission and storage business, particularly for natural gas. (See “This Is an Investment Theme Worth Paying Attention To.”)
The energy industry is ramping up its marketing efforts for LNG and its bulk transportation. The chemical industry is balking, as it doesn’t want higher prices.
In any case, oil and gas transmission and storage should continue to be a very good business with all the new production coming on stream. A company like EQT Midstream Partners illustrates that old economy businesses can pay through both dividends and capital gains.
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