The U.S. energy industry has quickly expanded, and to meet the growing energy production, there is a rising need to build out the necessary infrastructure to move the commodity around. In the meantime, investors can capitalize on the potential growth opportunity with a master limited partnership-related exchange traded fund.
Energy prices have been strengthening, and among the energy components, ethane has surged over 60% in just eight weeks on rising demand for the natural gas liquid used in feedstock for ethylene crackers, or large industrial facilities converting gas to another by-product.
Ethylene crackers process ethane into ethylene, which are used to produce plastics like polyethylene, the most commonly used plastic globally, and PVC. Startups of ethylene crackers across the US Gulf Coast led to rising demand for ethane.
“While normally taking a backseat to oil and natural gas, natural gas liquids have garnered increased attention as production growth has tightened fractionation capacity on the Gulf Coast and new ethylene crackers have increased demand for ethane,” Stacey Morris, Director of Energy Research, Alerian, said in a note. “The result has been a sharp increase in ethane prices to levels not seen in more than five years – a benefit for those midstream companies providing fractionation under percentage of liquids and percentage of proceeds contracts. For midstream, the situation highlights the growing demand for NGL-related infrastructure and supports high utilization for existing assets.”
Looking ahead, the U.S. Energy Information Administration projects consumption of ethane to ethylene will jump to 1.62 MMBpd from 1.24 on average from 2017 to 2019. Meanwhile, ethane production could increase to 1.93 MMBpd from 1.43.
Growth in MLP and Midstream Space
Consequently, the growth will require the necessary pipelines to transfer the commodity and the fractionation capacity to convert the unprocessed natural gas liquids into usable products, like ethane, propane and butane.
“Growing US energy production increases demand for energy infrastructure assets and creates growth opportunities for the MLP and midstream space, including projects to support energy exports. Investors looking for access to midstream assets in a diversified Fund may be interested in energy infrastructure ETFs,” Jeremy Held, Senior Vice President and Director of Research at ALPS Advisors, said in a note.
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For example, the ALPS Alerian MLP ETF (NYSEArca: AMLP) provides diversified, transparent exposure to a basket of infrastructure MLPs. Through something like AMLP, “investors have exposure to the continued buildout of energy infrastructure required to facilitate this growing US energy production,” Held added.
Gathering & Processing companies, which are crucial to the continued growth in NGL production, make up 24.3% of the Alerian MLP Infrastructure index, the underlying benchmark for AMLP, as of the end of September. Pipeline Transportation and Natural Gas names represented 28.4% of the index and also have leverage to growing NGL production.
For more information on master limited partnerships, visit our MLPs category.