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Natural Gas Compression Demand Put These 3 Stocks in Focus

Nilanjan Choudhury
Significant recovery in oil price through the March quarter of 2019 may hurt Valero Energy's (VLO) refining business.
Significant recovery in oil price through the March quarter of 2019 may hurt Valero Energy's (VLO) refining business.

Driven by shale extraction, natural gas output in the United States have climbed to record levels.

The EIA forecasts that U.S. will produce 90.7 billion cubic feet a day (Bcf/d) of dry natural gas this year, up from the 2018 average of 83.4 Bcf/d - a record high for the second consecutive year. The agency also projected that domestic gas output would rise to an all-time high of 92 Bcf/d in 2020. While soaring volumes are weighing on the outlook for prices, companies involved in natural gas compression services has been one of the significant beneficiaries of the upward production trend.

Shale Gas Advent Leads to Production Binge

With the advent of hydraulic fracturing (or "fracking") – a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals – shale production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract oil/gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic reserves. As a result, once faced with a looming deficit, natural gas is now available in abundance. Moreover, discoveries of vast reserves in the Marcellus and Utica shale regions of the U.S. should ensure continued ramp up in the commodity's near-to-medium-term drilling.

Compressors Vital for Natural gas Transportation

Natural gas compressors help the commodity to move from the wellhead (where it is produced) to the end market (where it is demanded). In other words, compression equipments are an integral part of natural gas pipelines, helping to push the fuel from one place to another. As the likes of Energy Transfer L.P. ET and Kinder Morgan, Inc. KMI transport natural gas through the pipeline system, a plethora of factors (like frictional pressure, elevation differences and distance) affects its movement and pressure. Compression service providers supply the infrastructure needed to maintain the flow and pressure throughout the transportation chain.

Strong Macro Drivers Point to a Booming Business

As already mentioned, natural gas production is expected to continue to break records for a number of years. 

Even the fundamentals of natural gas consumption continue to be favorable. The demand for cleaner fuels and the commodity’s relatively lower price has catapulted natural gas' share of domestic electricity generation to 35%, from 25% in 2011. Moreover, new pipelines to Mexico, together with large-scale liquefied gas export facilities have meant that exports out of the U.S. are set for a quantum leap. Finally, higher consumption from industrial projects will likely ensure strong natural gas demand.

By now its pretty clear that compression engines are necessary to move natural gas across pipelines. Therefore, the more volumes that needs to be transported, the higher is the demand for compressors. This translates into a robust underbelly of demand for compression services and equipments.

Capitalize on the Current Market Strength

The ongoing bullishness in natural gas supply and demand dynamics point to strong demand for players involved in the compression business. Importantly, these service providers earn their revenue based on the overall volume of natural gas transported rather than the price. The firms supply/lease their compressors to the natural gas industry at various stages of the value chain - exploration and production, midstream, or downstream operators. With demand for such services and equipments likely to grow consistently over the next several years, its makes sense to focus on the companies that dominate this industry with lion’s share of the market.

Companies in Focus

Given the growing demand for natural gas compression services, one could track three companies that are key players in this segment.

Archrock, Inc. AROC is involved in providing broad spectrum of natural gas compression services to its customers. The Houston, TX-based company has material presence in all major U.S. shale production basins and is also a leading supplier of aftermarket services to clients that own compression equipment in the United States. Archrock carries a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

USA Compression Partners, LP USAC, headquartered in Austin, TX, focuses on bigger horsepower compression units. The partnership’s large applications help them to secure longer-term contracts. USA Compression also holds a Zacks Rank #2.

CSI Compressco LP CCLP is a provider of compression services and equipment for natural gas production, gathering, transportation, processing, and storage. The Woodlands, TX-based firm is a vertically integrated end-to end provider of compression solutions in North America. CSI Compressco carries a Zacks Rank #3 (Hold).

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USA Compression Partners, LP (USAC) : Free Stock Analysis Report
Archrock, Inc. (AROC) : Free Stock Analysis Report
CSI Compressco LP (CCLP) : Free Stock Analysis Report
Kinder Morgan, Inc. (KMI) : Free Stock Analysis Report
Energy Transfer LP (ET) : Free Stock Analysis Report
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