Did you know the United States is projected to be the world's
top oil producer within the next five to seven years? At least
that's what the International Energy Agency has projected. This
means the United States is on pace to beat Russia and Saudi Arabia
in daily crude output.
How could this happen?
One word: shale. Shales are fine-grained sedimentary rocks
formed by the accumulation of sediments at the Earth's surface and
within bodies of water. Petroleum and natural gas get trapped
within the rock formations, so shales are rich resources of these
two energy sources.
Oil and natural gas are extracted from these shales through
hydraulic fracking -- the method of forcing a high-pressure mixture
of water, sand and lubricants sideways into small cracks in the
shale. This opens up a natural pipeline for the natural gas to
escape into the vertical well to be captured.
[See also "
My Top 2 Stocks for America's Energy
During the past decade, the combination of horizontal drilling
and hydraulic fracturing has allowed access to large volumes of
shale gas that were previously uneconomical to produce. But thanks
to fracking, the production of shale gas has rejuvenated the
natural gas industry in the United States.
That's why my colleague Andy Obermueller, chief strategist
ofwill run on natural gas" in the next few decades. (He's actually
putting the finishing touches on a special report on this topic
right now, including the names andticker symbols of the companies
that are set toprofit from this trend.)
Consulting firm Woods Mackenzie has projected that U.S. shale
formations are expected toyield 4.2 million barrels of oil per day
by 2020. Today, this number is roughly 1.6 million barrels, so you
can see the amazing growth opportunity in shale gas.
Trying tocash in on the "shale revolution" can be a high-stakes
battle. Many of the publicly-traded exploration companies are risky
at best. Even some of the larger, more established companies such
Chesapeake Energy (
Devon Energy (
Kinder Morgan Energy Partners (
have seen their share prices take a beating in the past 12 months,
largely due to the oversupply and subsequent drop in price of
But as I look at opportunities in shale, one company that stands
, a master-limitedpartnership (
) spun off from integrated oil company
Sunoco (NYSE: SUN)
Sunoco's logistics business has actively pursued growth
opportunities in burgeoning shale oil and gas for the past few
years. The partnership owns 5,400 miles of crude oil pipelines in
Texas, Oklahoma, and the Gulf coast and 42 terminals that provide
temporary storage for refined products. It is now focused on growth
opportunities that include pipelines being developed in the
Marcellus and Utica shale plays. Last September, it announced a
successful open season for Mariner East, a pipeline projected to
deliver propane and ethane from the liquid-rich Marcellus Shale
areas in Western Pennsylvania to Sunoco'sfacility in Marcus Hook,
Pennsylvania, where it will be processed, stored and distributed
Sunoco Logistics' core pipeline business is attractive and
generates healthycash flow each year. But crude oil and natural gas
liquids production in shale formations provide Sunoco with
opportunities to extend its pipeline network and collect attractive
fee-based cash flows.
Acquisitions of additional pipeline properties should also add
to this cash flow. Additionally, its marketing segment helps Sunoco
Logistics increase returns by locking inmargin opportunities. What
I like best about Sunoco is its potential for higher growth with
new projects and optimization of its existing assets. Sunoco's core
assets are liquids pipelines that receive inflation-protected
annual rate adjustments.
Sunoco Logistics Partners' latest quarterly results were quite
impressive as it delivered a 25% gain in adjusted
year-over-yearEBITDA to $188 million from $149 million. Sunoco's
main driver was its oil pipelines segment, which increased EBITDA
by 48% to $71 million. In addition, its terminals and lease
marketing segments each delivered impressive 20% gains. Sunoco also
posted an impressive 37% increase in distributable cash flow, which
provided a 25% year-over-year increase in per-unit distributions.
Thestock yields almost 4% and has a history of consistently
From a financial standpoint, Sunoco Logistics looks stable. It
faces modest debtmaturities of $175 million in 2014 and 2016. This
is not a concern, however, as it continues to maintain a very
strong balance sheet along with high levels of distribution
coverage. This mainly comes from excess cash flows from the
crude-oil leasehold business. Its current debt/EBITDA ratio is
around 2.7 times, with the potential ability to cover interest
payments by four-to-five times during the next five years.
Risks to Consider:
Because partnerships pay out a large percentage of their cash
flow, Sunoco Logistics is forced to use external funding for growth
and acquisitions. It also generates significantrevenue from
crude-oil marketing. This is a lower-margin business that has
cash-flow volatility due to the sensitivity of commodity prices. In
addition, because Sunoco Logistics is an MLP, investors in the
partnership's common units are responsible for their share of the
partnership's tax bill, which could increase tax-filing complexity.
However, given all these risks, I still like the diversified
approach at Sunoco Logistics and its dedication and commitment to
Action to Take -->
Buy Sunoco up to $60 a share. It is currently trading around $55
and myprice target is $66, representing a potential 20% gain in the
next six to 12 months. If you are looking for a safer way to get
onboard with the shale revolution, then this stock is definitely
worth a closer look.