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Strategic Advisors
Four bioenergy/natural gas investment themes for this year
With a surge in domestic energy production likely in 2025, and political support for natural gas at an all-time high, these considerations from another similar period (2009-2011) can inform you of likely market patterns and developments.
1. Fischer-Tropsch Diesel sourced from Natural Gas not Biomass. Expect F-T diesel production to increase substantially, but feedstock of choice is natural gas, not biomass, due to persistent low natural gas prices. Rentech (RTK) is a company that can shift feedstocks from biomaterial to fossil fuel. Expect them to benefit from this trend.
2. BioButanol wins, BioEthanol loses. Companies like Gevo Inc. (GEVO), have staked a significant portion of their business on conversion of ethanol plants to biobutanol. Butanol’s energy retention properties and non-corrosive nature make it much more attractive as a drop-in fuel than ethanol. BioButanol is also refined from non-food agricultural feedstocks, and is likewise not tainted by the corn-ethanol and subsidy stigma. Companies with already heavy investment in ethanol feedstock and distribution will shift in the intermediate-term to biobutanol. New entrants to the biobutanol production business will have a financial advantage over firms converting existing ethanol plants.
3. Consolidation of Natural Gas pipeline operators, spurred by persistent low natural gas spot rates, and massive future supply outpacing demand.
Names we see as consolidation targets or initiators:
Boardwalk Pipeline Partners (BWP), operating 14,200 miles of pipeline mainly in the midwest/rust belt.
Some factors supporting: No current expansion projects planned, as major players are scaling up acquisition activity (KinderMorgan’s acquistion of El Paso, Energy Transfer Equity, L.P. ‘s (ETE) acquisition of Southern Union .). Boardwalk’s stock performance has been stagnant over 3 year span, management needs to increase ROE, possibly through M&A activity.
NiSource Energy (NI), operating the Columbia Gas Transmission pipeline, serving the Mid-Atlantic, and significant market share in Indiana
Some factors supporting: 3.8 million customers, and facing significant challenges from major players in the Northeast Market. (Dominion, Chesapeake). They have invested in building Marcellus shale infrastructure to source Marcellus gas, and may look to expand this network through acquisition activity. Already there is some speculation about Exelon being interested in NiSource to enhance its own Rust Belt presence. They’re in a “lead or get swallowed” mode in 2012.
Centerpoint Energy (CNP), operating 20,390 circuit miles of underground distribution lines, serving 6 states.
Some factors supporting: Only two major pipelines, insufficient network to compete against industry giants. Kinder Morgan has made substantial acquisitions in their geographic service area.
4. Methanol demand increases in 2012, while prices remain constrained. Expect methanol shipping companies, and producers with integrated shipping operations to benefit (see our upcoming post “How to Ride the Methanol Wave” on January 11th to learn how to benefit!)
January 5, 2012