Enablers & Beneficiaries

The traditional classifications for energy chain companies are Upstream, Midstream, and Downstream. Miller/Howard Investments adds a fourth category: Enablers and Beneficiaries. Enablers are companies that facilitate energy operations such as oil field service companies, engineering and construction companies, and waste service providers. Beneficiaries are companies that can experience increased global competitiveness as a result of the shale revolution's newly abundant, inexpensive, domestic natural reserves. Petrochemical companies are an example of a Beneficiary. Most foreign plastics manufacturers use petroleum-based inputs, while US manufacturers rely primarily on natural gas liquids (NGLs) that are byproducts from shale wells. Because NGLs are available in abundant supply and at relatively lower cost, US petrochemical companies' production costs are lower than their foreign competitors.

Why Focus on Enablers and Beneficiaries?

We view the emergence of shale energy as more than just an additional source of oil and natural gas for the US market. It is first and foremost a technological revolution. As with all technological disruptions, the Beneficiaries of the industry's structural changes are not limited to those creating the disruption, in this case the commodities' producers and transporters.

Adding Enablers and Beneficiaries to a portfolio can increase portfolio diversification, as well. Investing in the energy value chain is cyclical, a dynamic that can accentuate returns when the market outlook for energy prices is positive. But when the industry falls out of favor, energy company stock prices can fall substantially, even if a particularly company's results are solid. The performances and stock prices of Enablers and Beneficiaries are less correlated to energy prices, and these companies can profit in different energy-price scenarios. Including these energy industry participants can help smooth out the cyclical highs and lows associated with energy investing.

What Makes Enablers and Beneficiaries Different?

Enablers and Beneficiaries don't fit neatly into any single industry. The primary characteristic is that these companies are likely to benefit from emerging, long-term energy market trends, particularly the growing supply of shale gas. A company's inclusion in the category is not based solely on its sensitivity to commodity prices, either. For example, petrochemical manufacturers may benefit from lower natural gas prices because this tends to decrease their feedstock expenses.

That's true, but that reasoning focuses solely on operating impact and ignores other relevant investment factors, such as market prices and demand, or company fundamentals.

The domestic nature of the natural gas market is another factor that influences Enablers and Beneficiaries. Oil is a globally traded and readily transported commodity, which makes it more difficult for most end users to develop and sustain a strategic advantage based on access to lower-priced oil. But production of US natural gas costs less than in other countries, and currently it is not easy to export that gas. That combination gives US companies an energy cost advantage when it comes to natural gas and is an important consideration in our investment analysis.

In many ways, the shale revolution's impact is similar to that experienced by some businesses operating during the California gold rush in the 1840s. Some miners struck gold and became fabulously wealthy, but many more went bust. In contrast, the Enablers and Beneficiaries of those times, such as Wells Fargo for gold transport and Levi Strauss for dry goods and jeans, prospered and survived. The shale revolution could have a similar wealth-generating capacity on some industries that do not directly participate in the production, transport, or processing of oil and gas.

How Natural Gas Touches Our Everyday Lives

Everyone knows that power and steam are generated from natural gas. But many investors are unaware of the ubiquitous role natural gas plays in our daily lives. An estimated 90% of all manufactured material contains some form of natural gas derivative. Consider the following natural gas byproducts and their common uses:

Ammonia, for example, is used in fertilizers, explosives, feeds, and carpets.
Chlor-alkali is used in siding, solvents, electronics, adhesives, toothpaste, and cosmetics.
Thanks to ethylene and propylene, we have food packaging, diapers, siding, automotive antifreeze, pantyhose, instrument lenses, and tires.

Hydrogen, another byproduct of natural gas, makes gasoline and heating oil burn cleaner, and is essential in the manufacture of fuel cells.

Methanol is responsible for the gasoline, plywood, insulation, paints, adhesives, electronics, and signs we use every day.

All of these come from natural gas. So the next time you go to the dry cleaner (chlor-alkali), buy a pair of sneakers (ethylene), or paint a sunset with acrylics (methanol), remember the importance of natural gas in our daily lives.


© 2019 Miller/Howard Investments, Inc. All rights reserved.

This material represents Miller/Howard Investments' views. These views may change based on changing circumstance. The information provided should not be considered a recommendation to buy or sell any security, and should not be considered investment, legal, or tax advice. Information is obtained from sources believed to be credible and reliable, but its accuracy, completeness, and interpretation cannot be guaranteed.