The Three Musketeers of the Next Energy Revolution


Unconventional oil or light tight oil from shale formations is rapidly becoming an important and abundant resource in the U.S. As a matter of fact, according to the Energy Information Administration (EIA), liquids production is set to increase nearly 26% from 10.4 million barrels per day in 2011 to 13.1 Mmbbls/d in 2019, primarily as a result of the increased production of crude oil and NGL from tight oil formations. The following chart shows the evolution of domestic crude production.

Source: EIA Annual Energy Outlook 2013

Tight oil production is estimated to reach 2.8 Mmbbls/d in 2020 and then drop to about 2 Mmbbls/d in 2040, with the expected depletion of sweet spots. However, about 25.3 billion barrels of tight oil are expected to be produced cumulatively from 2012 through 2040, which makes this unconventional resource account for about 33% of total U.S. oil production.

Source: EIA Annual Energy Outlook 2013

Notably, a fast rise in shale oil production has dramatic effects on pricing, as the shale gas revolution taught us. Therefore, estimated oil prices in the coming decades could have been projected way too high. As a result, E&P companies would make less profit than expected, and this would lead to reassessing the entire portfolio of assets and reviewing the business model altogether.

With the enormous amount of capital required to develop a producing asset, E&P companies would need to sell maturing assets earlier than expected to midstream companies with the objective of getting back the return on investment needed and allocate capital in other project developments. However, for MLPs, these challenging events could bring new opportunities in asset acquisitions. Doing so, I uncovered three solid MLPs that would profit from that situation, given the infrastructure already in place. Let's take a look at these three musketeers.

The three MLP musketeers
The first MLP on my list, Kinder Morgan Energy Partners , owns or operates approximately 80,000 miles of pipelines and over 180 terminals.

Source: Kinder Morgan Slide, Investors Presentation

The company's assets are the core of North American energy infrastructure that generate steady cash flows distributed to its shareholders. Kinder has relatively little exposure to commodity price volatility, reducing the risk considerably. The MLP has delivered an average annual return of 25% to its shareholders since 1997.

My second favorite is Brookfield Infrastructure Partners , a MLP that owns and operates premier worldwide infrastructures regrouped in three categories: utilities, transport and energy. Brookfield has one of the world's largest export terminals, with 85 Mtpa of coal handling capacity, more than 6,150 miles of transmission lines in North and South America and over 2.5 million electricity and natural gas connections.

Furthermore, besides being the sole provider of rail service in southwestern Australia with about 3,170 miles of tracks and owning 30 port terminals primarily in the U.K. and across Europe, Brookfield has more than 6,630 miles of natural gas transmission pipelines in the U.S. and 300 Bcf of natural gas storage in North America.

Another great MLP is Energy Transfer Partners . This MLP currently owns and operates approximately 43,000 miles of pipelines of natural gas, NGL and crude oil. It also owns 100% of Holdco, a company that in turn owns Southern Union and Sunoco, as well as 70% interest in Lone Star NGL, a joint-venture that owns and operates NGL storage, fractionation and transportation assets.

Southern interstate pipeline accounts for more than 10,000 miles of pipelines that transport natural gas to major markets in the Southeast, Midwest and Great Lakes region. Sunoco's retail business markets Sunoco's gasoline brand through about 5,000 retail outlets in 23 states.

Furthermore, it owns the general partner and approximately 33.5 million common units in Sunoco Logistics Partners. Sunoco Logistics has a geographically diverse portfolio of crude oil and refined product pipelines as well as terminal facilities.

My Foolish conclusion
The three MLP musketeers are three well-established companies in the U.S. energy industry and each are set to profit from the oil shale boom opportunities. Total primary energy consumption in the U.S. is expected to grow by 0.3% per year from 2011 until 2040, according to the EIA. Moreover, global demand for energy is following that trend, growing even further in emerging countries such as China and India.

America's energy explosion
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.

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Stephan Dube has no position in any stocks mentioned. The Motley Fool recommends Brookfield Infrastructure Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published