The hydraulic fracking and advanced drilling boom has unleashed an overabundance of natural gas. As exploration and production (E&P) firms have been able to tap the various shale formations across the United States with increased fervor, inventories of the fuel have continued to skyrocket. So much so, that prices for the fuel are now touching decade lows. While some natural gas firms like EnCana (NYSE:ECA) have begun paring back production, the truth is many drillers can't cut too much. The bulk of oil and natural gas land contracts come with provisions requiring E&P firms to continue their drilling efforts or risk losing their leases. Already, natural gas storage facilities are closing in on peak capacity. For investors, there's big money in the shortage of storage.
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Continued Rising Inventories
While the latest Energy Information Administration (EIA) natural gas storage showed a slightly smaller than expected increase in natural gas supplies, it was an increase nonetheless. According to the latest report, ending May 5, storage levels in the U.S. currently sit at 2.606 trillion cubic feet (Tcf). That's an increase of more than 799 billion cubic feet (Bcf) from last year and 803 Bcf over the five-year historical average. Demand has picked up a little, but consumption of natural gas generally peaks during the winter months. However, the mild winter of 2011-2012 removed much of the seasonal demand for the fuel and added pressure to the already building inventories. The EIA predicts that if weekly inventories continue to build at the five-year averages, supplies would exceed the 4.1 Tcf worth of total storage capacity by about 375 Bcf sometime in October.
SEE: Understanding Oil Industry Terminology.
That's where the private sector is stepping up to the plate. A variety of firms provide both regulated and unregulated infrastructure designed to alleviate this issue. Without storage, natural gas firms are forced to dump their production on an already glutted market. This ultimately causes prices to continue to fall further and hurt profits. By providing the necessary storage, these infrastructure firms are able to collect big fees from the E&P firms while the seasonality of the natural gas sector takes place. With production continuing to rise, demand for these storage facilities is at an all-time high. However, only about half of the 895 Bcf worth of storage that the Federal Energy Regulatory Commission (FERC) approved since 2000, will come online in the next three years. That means there is still a shortage of storage on the horizon.
Playing the Need for More Infrastructure
With natural gas production continuing to rise faster than demand, the firms that provide the necessary storage infrastructure are in a unique position to profit. The UBS E-TRACS Alerian Natural Gas MLP ETN (ARCA:MLPG) tracks 15 different midstream firms who receive the bulk of their cash flows from the transportation, storage and processing of natural gas and natural gas liquids. This includes holdings in firms like Crestwood Midstream (NYSE:CMLP) and Chesapeake Midstream (NYSE:CHKM). The exchange traded note (ETN) can provide a broad play on the overall need for more natural gas-based infrastructure. The fund currently yields 6.67%.
However, for those investors looking to directly play storage assets, there are only two ways to gain access: PAA Natural Gas Storage (NYSE:PNG) and Niska Gas Storage Partners (NYSE:NKA). Spun off from pipeline superstar Plains All American (NYSE:PAA), PAA Natural Gas operates three storage facilities including its 32 Bcf Pine Prairie salt cavern that is connected to eight large interstate pipelines. Additionally, the facility is close to the Gulf Coast and potentially new LNG exporting terminals. The master limited partnership gets almost all of its cash flow from fees generated at these sites. Niska represents the largest independent player with more than 206.5 Bcf of working gas storage capacity under its umbrella. Shares of the firms yield 7.8 and 12.7%, respectively.
SEE: Discover Master Limited Partnerships.
Finally, Inergy Midstream LLC (NYSE:NRGM) could be an up-and-comer in the natural gas storage world. The company recently purchased US Salt LLC from its parent, Inergy (NYSE:NRGY) for $192.5 million. That will add roughly 10 Bcf of available cavern space that could potentially be developed for natural gas storage. Shares of Inergy Midstream yield 7.2%.
The Bottom Line
With inventories of natural gas continuing to build at record paces, analysts predict that we will run out of excess storage capacity sooner rather than later. For those firms in the sector, that could mean higher fees and earnings as demand rises for their infrastructure. The previous picks make ideal choices to play the shortage in storage.
SEE: How To Profit From Natural Gas.
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.