How To “Harvest” Shale Dividends
The Eagle Ford shale play in South Texas is set to pay dividends, quite literally!
Producers in this booming shale patch are already cashing in. They’ve locked in lease agreements, permitting and have already figured out the best way to get oil and gas to market.
Indeed, the “harvest” phase of this energy cycle is getting under way. Better yet, for resource investors like us, now’s the time to get in on a long-term stream of payouts…
If you remember from our conversation yesterday, there are three evident stages in America’s shale boom: discovery, optimization, harvest.
The discovery phase leads to wildcat profit opportunities. The optimization phase is where you can lock-in on efficient producers and look for more reliable share price growth.
Today I want to discuss the harvest phase, which is where you can cash in on a dividend stream from the flow of oil & gas to market.
To get a grasp on this lucrative stage and the budding opportunities for America’s energy future, let’s take a look at the anticipated oil flow…
Pipeline companies are great place to ping for this data. These companies are always monitoring the future flow of crude oil (and natural gas.) After all, it’s their business to anticipate and plan for pipeline projects… they want to be in front of the energy flow.
According to Greg Armstrong, CEO of Plains All American Pipeline LP (the 4th largest MLP by market cap in the U.S.), production from the Eagle Ford could reach 1.8 million barrels per day (bpd) in “just a few years.” That estimate is a bit more ambitious than other production forecasts, which place Eagle Ford production above 1.6 million bpd in the next five years or so.
But whether it’s 1.6 or 1.8 million bpd, the Eagle Ford production ramp-up will put the rest of North America to shame.
Here’s how it stacks up:
If you’re looking for growth, look to South Texas.
The Eagle Ford is set to ramp up production of oil (not to mention natural gas and associated “wet” byproducts.)
Truly, I wouldn’t have to go too far out on the limb to say that a company like Plains All American (PAA) with assets throughout the formation, will be quite busy in the years to come. Plains holds assets in all of the growth plays listed above – including pipelines, storage, railcars, trucks and barges.
When the oil starts to really flow in South Texas, and across the country, companies like Plains are well positioned to profit. More importantly, for our “harvest” phase discussion, Plains will be able to provide a steady dividend, which today yields around 5%.
Concentrating on the Eagle Ford, Plains is just one of the many opportunities that could offer you stable income as the oil and gas begins to flow…
Another company to look at during this harvest phase is DCP Midstream (DPM.)
DCP has been a midstream player in Texas’s natural gas scene for years, and today finds itself right in the middle of a booming Eagle Ford play. [Editor’s note: in case you’re not familiar with the oil and gas lingo, “midstream” is the logistical stage of gathering and processing oil and gas. While the “upstream” players pull the energy from the ground, the midstream guys gather and process it. From there the “downstream” activities commence, which include selling and distribution.]
Of note, DCP is the No. #1 natural gas liquids (NGL) producer in the U.S. — holding approximately 17% of the market. NGLs are the “wet” byproducts that are produced alongside oil and gas in the Eagle Ford – and with demand for these newly-found byproducts coming out of the woodwork, it’s a profitable business to be sure. Along with NGL processing, the company also holds key pipelines and other midstream assets in the heart of the Eagle Ford play.
As an aside, let me remind you that the Eagle Ford is producing an enormous amount of dry natural gas, along with the oil production. From what I’m hearing the estimated ultimate recovery (EUR) for natural gas-specific wells is even higher than oil-specific wells. Production should be ramping up in the years to come, and even with moderate to low natural gas prices, midstream players can cash in on this boom.
Heck, it wouldn’t be an understatement to say that almost every midstream player in the Eagle Ford area is set to cash in. But here at the beginning of the boom, we’ll be much better served looking at a top-tier company, like DCP.
Since 2009, DCP has gradually increased its dividend payouts. At its current share price, the company supports a solid 5.75% dividend. And I’d be remiss not to tell you about DCP’s 3-year uptrend, after recovering from 2008’s market meltdown, prices are still up 75% since October 2009.
To sum up the situation we’re seeing in the Eagle Ford — and across America’s newly found shale plays — there are plenty of impending bottlenecks. And to mix up my metaphors a bit, for the right midstream players these bottlenecks are cash cows! Indeed, as I type, companies are jockeying for a position to help move crude oil and natural gas to market in South Texas.
But, let me be clear on one point. Profiting from the harvest phase isn’t as easy as it seems. Don’t just run out and grab any 8% dividend-paying company you can find. For instance, plenty of companies with those too-good-to-be-true dividends didn’t make today’s short list of opportunities (for good reason.)
Instead of looking at just a dividend payout, concentrate on a company’s long-term reliability. Have share prices held steady or increased? Has the company been able to keep payments increasing over time?
These are all questions you need to ask yourself before you plunk down any money on dividend payers.
With that said, now’s certainly a great time to go hunting.
Keep your boots muddy,
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