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Natural Gas Capacity Plays


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With the pipeline companies it's a little complex.  Many (though not all) of the underlying pipelines basically arbitrage the different prices between two locations.


The shale boom is causing dislocations in the natural gas market.  A lot of infrastructure was setup to receive gas from the Gulf of Mexico... but lower gas prices and deepwater horizon-related costs are reasons for lower GoM production.  A lot of infrastructure was setup to import natural gas into the US via LNG shipments.  That pipeline volume is presumably down a lot.  Everybody is converting their LNG import terminals into export terminals.  It's a crazy reversal.


On the other hand, there is opportunity for pipeline companies.  Shale assets produce "rich" natural gas as opposed to dry natural gas.  Weirdly enough, rich natural gas burns too hot for most customers because it contains too much ethane.  The gas has to be sent to cyrogenic plants to remove the ethane (which turns into a liquid, which can be trucked away or sent somewhere else via pipeline).  Refrigeration plants also remove ethane but they don't remove enough; some 10-Ks for shale companies say that they are writing down their investments in refrigeration plants. 


So... the US will need to built the pipelines and the cyrogenic plants and more pipelines to move ethane and natural gas liquids to other markets.  Because most shale companies are moving to natural gas liquids plays, they will produce a lot of rich natural gas and a lot of NGLs.  In the Utica shale, they can't drill more wells (or have to lower production on new wells) until new infrastructure comes online.  There is way too much rich gas.


There's the CoBaF thread on KMI warrants:


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NVGS is a large mid size LPG carrier company that Wilbur Ross took out of the old Lehman.  They are on a major fleet expansion.  The idea is that petrochem liquids production is going to spike from NGLs in the wet gas plays as well as from increased refinery export of LPGs that are derived from the refining process.  It's not cheap though.

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  • 2 weeks later...

How about Ackman's APD (Air Products & Chemicals)? They supply gas liquefaction equipment. It's not a pure play, but I think it is the main reason behind Ackman's bet, aside from the momentarily bad capital allocation that he tries to fix.

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I like frac sand as a way to capture the greatest leverage to growth in both oil and gas.  Because the latest technology utilizes much more sand per well it is the fastest growing part of the oil and gas industry.  Of the three frac sand plays I like EMES the best.

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CBI (Chicago bridge and Iron)


As many of you probably know it's a Buffett/Weschler/Combs pick


Some points from 10-K and IR presentation:


Their major source of revenue is winning major construction projects in


1. Hydrocarbon refining, petrochemicals and natural gas industry. Building LNG terminals , Engineering procurement and construction activity

2. Technology patents related to refining hydrocarbons

3. Nuclear power services related revenue


Cautionary note: This is my newbie thesis for the stock


Order book is at the end of DEC 13 is $ 25B and has been growing. TTM Revenue at 9.6B. Gross margins around 12-13%. They predict the capex on construction projects related to energy sector go on till 2020 [iR presentation]. Pretty much every marquee oil company is their client


Its priced at 14 times next year earnings, but if the cycle persists and they continue winning energy related projects, EPS could grow double digits.


Some Risks:


1. Industry is very competitive for winning projects, pricing and margins pressure

2. Capital intensive depending on the type of project executed ( fixed or cost plus)

3. Projects on the backlog can be cancelled


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