This Energy Company Has a Major Edge

 | Mar 07, 2013 | 4:00 PM EST  | Comments
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lng

When investors talk about the "first-mover advantage," they're usually talking about technology stocks. A company that's first to the market can lock in an edge that competitors can find nearly impossible to reduce.

Right now, I believe there's a first-mover advantage in the energy sector that you ought to consider adding to your portfolio. And because it can take years to move a project from drawing board through permitting to construction to startup in the energy industry, first-mover advantage in this sector can be extremely long-lasting and extremely profitable. For example, Cheniere Energy (LNG) is the only company that has a license to export liquefied natural gas from the U.S.

Today, let me tell you about another first-mover advantage created by the boom in U.S. shale oil. This one involves the master limited partnership Kinder Morgan Energy Partners (KMP).

Cheniere shows a classic first-mover scenario. There are a score of natural gas export projects in the wings waiting for a license from Washington and ready to begin construction. But Cheniere's Sabine Pass project is nearing the end of construction, and startup is scheduled for 2015. As the first mover, Cheniere has been able to secure contracts for almost 90% of the plant's capacity long before the plant is in operation. And Cheniere will be able to reap the full difference between the low price of natural gas in the U.S. -- which is due to the U.S. shale boom -- and the high price of natural gas in markets such as Japan and South Korea.

The first-mover advantage for Kinder Morgan is a result of the boom in U.S. oil production from unconventional resources from Texas to North Dakota, which has resulted in a glut of light sweet crude on the U.S. market. Most U.S. refineries are set up to refine the relatively heavy sour oils that the U.S. has historically imported, so right now there's simply too much light sweet crude for U.S. refineries to handle. That has driven prices of U.S.-produced light sweet crude to a record low against the global Brent oil benchmark. In the fourth quarter, the average spread between the price of U.S. light oil and Brent crude hit $26.47 a barrel.

One solution would be to export this oil so it could be refined elsewhere, but that runs straight into a U.S. law that bans crude exports.

Which is where a loophole in the export ban comes in. Exports of crude oil are restricted by the law, but exports of refined petroleum products aren't. In fact, in 2012, the U.S became the world's biggest exporter of refined petroleum products. If more light oil from the mid-Continent oil boom could be refined into oil products, and then exported, the oil glut would be over.

Enter the mini-refinery.

These easier and quicker-to-build refineries are designed to process U.S. ultra-light crudes -- about 14% of U.S. production -- just enough so that they qualify as refined fuels and can be legally exported. The refinery process is especially simple, because ultra-light crudes are so close to refined products to begin with.

Quite a few companies, such as Valero Energy (VLO) and Marathon Petroleum (MPC), are building these mini-refineries, but Kinder Morgan's mini-refinery is scheduled to come on-line first, in early 2014. And the cash flow from this new business comes just as the cash flow from Kinder Morgan Energy Partners' fastest-growing business segment -- supplying and transporting carbon dioxide to oilfields, where it is used to increase oil production in older or low-pressure fields -- has started to flag.

The new mini-refinery business means Kinder Morgan should have plenty of cash flow to not only pay out the current 6.1% distribution on these units but also to keep up the MLP's history over the last five years of increasing payouts by an average of 7.4% a year.

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