Commodities

The Secret Energy Commodity That’s Up 57% Since Mid-May

By Charles Sizemore  |  August 2, 2018

When it comes to energy, crude oil receives all the attention from the media and investors.

Given its importance to our modern way of living, the focus is warranted.

The geopolitical forces that can influence the supply-demand picture also make for great headlines, especially with President Trump’s angry tweets about oil prices.

Let’s venture off this well-worn path this week and consider another hydrocarbon that’s rallied hard this year.

Energy Esoterica

Ethane is a natural gas liquid that’s produced alongside crude oil and natural gas.

After being processed in petrochemical facilities, ethane becomes ethylene, a base chemical that’s the primary building block of many plastics and synthetic materials.

Ethane started to collapse in early 2012, as surging production from prolific U.S. shale plays swamped domestic demand.

The oversupply was so severe that the industry “rejected” as much as 600,000 barrels of ethane per day into natural-gas pipelines.

At the time, insufficient demand meant that it wasn’t worth the incremental cost to separate out the ethane and sell it on the open market.

But if there’s one thing that the shale oil and gas revolution has taught us, it’s that the arbitrage opportunities created by these bottlenecks don’t last forever.

Polly, Want a Cracker?

With all the talk about OPEC, Iran, and oil prices, you probably didn’t notice that U.S. ethane prices have surged by more than 57% since mid-May.

That’s right, 57%!

The proximate cause of this jump in prices: the start-up of several world-scale ethane crackers on the Gulf Coast, which, coupled with an uptick in exports, have tightened the market significantly.

Why should you care?

The long-anticipated recovery in ethane prices has rejuvenated the fortunes of energy companies that own and operate gas-processing plants and fractionation plants.

These facilities remove natural gas liquids from the gas stream and separate them into individual components – ethane, propane, butane, and natural gasoline – for sale.

Surging ethane prices mean higher volumes at these facilities and fatter profit margins.

Again, why should you care?

Heading into this earnings season, three of the five top-performing master limited partnerships (MLPs) this year have significant exposure to gas processing.

All three of these names – Crestwood Equity Partners LP (NYSE: CEQP), Enable Midstream Partners LP (NYSE: ENBL), and DCP Midstream LP (NYSE: DCP) – have delivered total returns of more than 20% this year.

My Peak Income portfolio includes three names that offer exposure to these same trends and yields in excess of 7%.

Even better, the rally in ethane prices creates opportunities for these companies to build incremental gas-processing and fractionation capacity.

That adds up to more cash flow to distribute to shareholders – and it’s yet another bullish sign for my favorite MLPs and midstream energy companies.

Charles Sizemore

Charles Lewis Sizemore, CFA specializes in finding value opportunities outside of the mainstream stock market. He is a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, and has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post.Full Bio