I'm Michael Roomberg, a portfolio manager with Miller/Howard Investments. This video is the first in a three-part series on timely issues related to North American energy focusing on Midstream Pipelines, Energy Stock Valuations, and Natural Gas Demand Growth.
Midstream companies and MLPs will begin to report earnings in the coming weeks. We expect that favorable commodity price and volume trends will continue to benefit the sector, and anticipate that most reports will feature favorable results relative to consensus expectations. We believe that some companies in particular will benefit from temporary arbitrage opportunities that—in very simple terms—will result from the fact that in many regions, prices for commodities like natural gas, natural gas liquids, and oil at one end of a pipeline are much lower than the other end of the pipeline.
How can that be? It's mainly due to the fact that growing production is now exceeding existing pipeline takeaway capacity, and producers are competing to get their products to market in any way they can—and in particular are competing on price. Pipelines are the cheapest and the safest route to market, and so these producers prefer to ship via pipeline, if possible, but if necessary will do so by more expensive rail and truck. In certain circumstances, pipeline owners can capture the wide differentials between prices at each end of their pipeline, collecting fees that can be up to 10 times the normal fee for transporting commodities from field to market. While this is great business and sort of bonus cash (for the companies that own the pipelines), as investors we recognize that these earnings are temporary in nature. So more importantly for us, this market dynamic is creating tightness that is the favorable basis for new long-term contracting, and in fact a number of our portfolio holdings have received sufficient long-term contractual commitments to proceed with major new pipeline developments that will enter service and begin flowing oil, natural gas liquids, and gas—and most importantly for us, cash flow—in coming quarters.
NGL: Natural Gas Liquids are components of natural gas that are separated from the gas state in the form of liquids.
MLP: Master Limited Partnership is a type of business venture that exists in the form of a publicly traded limited partnership. It combines the tax benefits of a partnership—profits are taxed only when investors actually receive distributions—with the liquidity of a public company.