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The Other Part of the Petroleum Market

December 05, 2018

Red October and Negative November wasn’t just for stocks, as petroleum prices also got whacked. West Texas Intermediate (WTI) and Brent crude oil both gave back a large part of their gains over the past three years. WTI has dropped from the recent high of $76.41 to a current $53.57. And Brent fell from similar highs of $86.29, to a current $62.31.

This is not a good market right now, with traders getting their bear claws out to take a swipe at the bulls, and there aren’t too many of the thundering herd running right now.

It really comes down to what the globe expects from the simple economics 101 questions of how much supply is coming to the market and how much demand there will be.

And there are some conflicts in how the estimates are being thrown around, which is resulting in market mayhem in prices.

But one part of the petroleum market that isn’t in mayhem for investors is the natural gas market.

Natural gas has soared just as crude slipped. The US market for natural gas has spiked from the beginning of October to date from $3.17 per million British Thermal Units (MBTU) to $4.43, a gain of 39.75%.

The reason is a cold snap around the US, and forecasts for the winter months are being rolled out showing lower-than-average temperatures for large swaths of the US—that means Americans will consume a lot of gas to heat homes, institutions and businesses.

And the gas story gets better. Inventories are low, having dropped to levels not seen since 2003. Overall storage levels are on average 16% under five-year seasonal levels. So, this isn’t about a quick spike, but rather it should continue in higher prices into the winter months and early spring.

US producers are pumping more and more gas out of the ground, but with rising shipments for industry, including for feedstock in petrochemical companies, there’s been less headed for storage.

There’s also the developing story on exports. Already, gas is being exported via pipe to Mexico and beyond. And liquified natural gas (LNG) is another major infrastructure build-out for the gas market, which will send more gas overseas, taking it away from US consumers and US storage.

Some of the better companies that are already capitalizing on natural gas and LNG are also some of the better dividend payers right now.

I’ll start with the pipelines with a big gas focus. Enterprise Product Partners (EPD) has a great network of pipelines for gas and gas liquids. The company continues to have strong revenue growth, with the trailing year seeing gains of 27.00%. Operating margins are fat at 13.40%, which drives a strong return on its shareholder’s equity of 16.10%.

The dividend is attractive, with a yield of 6.60%, and the distributions have been climbing over the past five years by an average of 4.90%

Then there’s Dominion Energy (D). While it is well-known for its utilities operations, it is increasing its footprint in natural gas and LNG with its expanded pipelines and LNG export facilities, which will work to serve global demand for LNG.

Revenues for the combined operations (regulated utilities businesses and its gas and LNG units) continue to rise, with the last quarter seeing an increase of 3.45%. Operating margins are ample, with a current rate of 33.32%. And this is driving a return on shareholder’s equity at 17.90%.

The dividend is yielding 4.43%, and the distribution has risen over the past five years by an average of 7.80% per year.

Both of these companies make for good and rising dividends from  the buoyant natural gas markets.