The global commodity market is experiencing a significant transformation, fueled by supply disruptions, high demand, and the U.S. shale renaissance. This shift has led to a surge in energy and materials stocks. In today’s FA Alpha Daily, we explore NGL Energy Partners (NGL), a key player capitalizing on these trends with its vital water disposal services and recovered crude oil sales.
FA Alpha Daily:
Wednesday Credit
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Energy and materials stocks saw the largest net purchases on U.S. equity prime brokerage books last week, highlighting hedge funds’ views that these companies will benefit from favorable macroeconomic trends.
The Goldman Sachs analysis found that hedge funds were net buyers of energy and materials stocks for the third consecutive week.
The increased hedge fund interest in commodity-linked equities comes amid a broader surge in commodity prices this year.
Inflation has soared to multi-decade highs in many countries due to supply disruptions and strong demand as economies recover from the pandemic.
This has driven up prices for oil, natural gas, metals, agricultural products, and other raw materials.
Crude oil prices have risen over 15% in 2024 and are now above $80 per barrel.
Natural gas prices in Europe have skyrocketed to record highs due to concerns over gas supplies from Russia.
Metals like copper, aluminum, and steel have also witnessed big price gains on strong industrial demand and limited supply.
Hedge funds believe these commodity bull markets still have further to run. They are betting commodity producers and materials firms will post robust revenue and earnings growth as prices remain elevated.
A significant factor driving this strategy is the U.S. shale renaissance.
The U.S. shale renaissance refers to the rapid increase in domestic oil and gas production due to advancements in drilling techniques, such as hydraulic fracturing (fracking) and horizontal drilling.
This revolution has transformed the United States into one of the world’s leading energy producers.
As a result, the U.S. is now a crucial partner for European countries seeking alternative energy sources after disruptions in Russian energy supplies due to geopolitical tensions and sanctions.
The benefits of the U.S. shale renaissance are not limited to oil and gas extraction companies. Firms that support these extractors, including those providing essential services and infrastructure, are also experiencing increased demand.
One such company is NGL Energy Partners (NGL), which offers critical water disposal services and sells recovered crude oil.
The company has a large footprint in the major U.S. shale plays like the Permian, DJ, Eagle Ford, and Bakken basins.
NGL owns and operates large networks of pipelines and facilities for gathering, treating, recycling, and disposing of produced water from shale wells.
Produced water is a byproduct of fracking and its disposal is a major operational challenge and cost for E&P companies.
NGL also recovers crude oil, natural gas liquids, and brine from the water, which it sells back to producers.
As shale drilling and completion activity picks up with higher oil prices, the volume of produced water needing handling and disposal will rise significantly.
This increases utilization rates and demand across NGL’s extensive midstream infrastructure footprint.
Despite these positive trends, the market has not fully recognized the potential of NGL reflected by the company trading at 7.8x Uniform P/E.
While NGL reported softer-than-expected results for Q4 in its Crude Oil and Liquids Logistics segments, the company reiterated its positive outlook for the future driven by its Water Solutions business and broader industry tailwinds.
The water Solutions segment performed well in Q4, driven by increased completion activity from NGL’s investment-grade customers.
Management guided for double-digit volume growth across the segment in coming quarters backed by a multi-year pipeline of contracted work.
This provides significant visibility into future cash flows and shields the company from potential volatility in oilfield activity.
Looking ahead, NGL’s management is optimistic that higher commodity prices will sustain the momentum in the U.S. shale basins, supporting production growth of 10-15% in its key operating regions.
While some near-term softness was seen, NGL offers a good upside scenario with attractive valuations.
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This analysis of NGL Energy Partners (NGL)’s credit outlook is the same type of analysis that powers our macro research detailed in the member-exclusive FA Alpha Pulse.