Last year was a record year for master limited partnership (MLP) capital-growth spending. With phrases like “U.S. energy independence,” “shale plays” and “crude by rail” making national headlines, the explosion of midstream opportunities in the past three years is no longer anyone’s secret.
With such rapid production growth in the U.S., it has been practically impossible for energy infrastructure development to keep pace. Construction crews have been working at full capacity. According to analyst estimates, in 2013, MLPs spent $37 billion building new assets and expanding capacity on existing assets—all to move and process new production growth.
Three years ago, when the size of the shale plays was known but their impact was only first being realized, the Interstate Natural Gas Association of America put out a much-quoted study, estimating that North America would need $250 billion in new energy infrastructure by 2035, or $10 billion a year. Last year quadrupled that estimate, and 2014 is on pace to do the same.
Conservative with capital
MLPs are very conservative with their capital and rarely build speculative projects. Before a project is begun, long-term contracts are signed dictating fee-based and take-or-pay models, such that utilization risk is transferred to the customer. As of January, MLPs have announced around $30 billion of growth spending for 2014. However, this number is expected to move higher throughout the year as companies finalize negotiations for new projects and announce them to the public.
The announced MLP projects include pipelines connecting shale plays, reversals and conversions of existing pipelines, as well as storage tanks and processing facilities. For example, the Marcellus shale in the Northeast contains such prolific amounts of natural gas near major population centers that pipelines previously serving this area will be converted to move other products or reversed to move hydrocarbons to Midwestern population centers.
On the oil side, part of the reason crude by rail has been so popular—despite the expense—is that rail loading facilities were immediately available to take production to market.
Kinder Morgan expects to spend $3.4 billion in 2014, $1.4 billion in 2015 and $8.3 billion in 2016 and beyond. In the early years, most of the growth will come from pipelines and terminaling in the U.S., while in later years, Kinder will be focusing on Canadian assets. Enbridge Energy Partners has $8.5 billion in identified projects that will connect domestic crude oil supplies to market demand. Currently, Enbridge is already transporting much of the U.S.-bound, western Canadian production, as well being very active in the Bakken.
MarkWest Energy Partners has announced $3 billion of capital projects. With their existing Marcellus footprint, they are well positioned to have first-mover advantage in the Utica shale.
All of this spending is expected to translate into distribution growth of 6% to 8% in 2014. It is important to note that this is an average and companies will be above and below that range. Investors should focus on names that have an established footprint in prolific, liquids- rich plays; visible, multiyear organic growth opportunities; and management teams with a history of bringing projects online under budget and ahead of schedule.
In the movie of the development of U.S. energy independence, 2014 is the montage sequence. The audience knows the plot, the major characters and can probably guess the ending.
Now, it is the series of short shots showing construction crews, negotiations, financing and hard work. It won’t be until 2015 and 2016 that we see the resolution of this hard work in tightening spreads, rising liquefied natural gas exports and more stable commodity prices.
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