Friday May 25, 2012
by Harry Domash, editor Dividend Detective
Inspired by expectations that natural gas prices are expected to stay low for the foreseeable future, we’re adding two picks to our portfolio that are likely to benefit from low natural gas prices.
One is a chemical company, and the other a fertilizer maker. Here's a look at Dow Chemical Company (DOW) and Rentech Nitrogen (RNF).
Unless you’ve been on the moon, it won’t be news to you that natural gas prices, close to record lows, are likely to stay down for the a long time.
This is all due to the development of new methods for extracting natural gas from deep underground rock formations. Thanks to these new techniques, called hydraulic fracturing, or “fracking,”
U.S. natural gas production has soared more than 25% just since 2005. With supply now exceeding demand, natural gas prices have dropped from a peak of around $13 per million British Thermal Units in 2008 to $2.50 or so today.
How can investors profit from low natural gas prices? Here are two ideas: chemicals and fertilizers. Natural gas is the fuel that powers almost all chemical plants, plus it’s also the key ingredient used to make plastics and other chemicals.
When it comes to fertilizers, natural gas is the major ingredient in nitrogen fertilizers. With that in mind, we’re adding Dow Chemical (DOW) to Dividend Detective’s Manufacturing & Services portfolio and Rentech Nitrogen (RNF), a master-limited-partnership (MLP), to our Partnerships-Excluding Energy portfolio.
Founded in 1897, Dow Chemical is the largest chemical company in the U.S. and second only to BASF worldwide.
Dow produces plastics such as polystyrene, chemicals used in pharmaceuticals, paper coatings, paints and advanced electronics, and for water purification. In agriculture, Dow makes insecticides, herbicides, fungicides and genetically modified plant seeds.
Dow owns 50% of silicone plastics maker Dow Corning which makes sealants, lubricants, cookware, and other products based on its silicone-based technologies.
Expansion minded, in 2009, Dow acquired specialty chemical maker Rohm and Haas, and in 2011, formed a joint venture with the Saudi Arabian Oil Company to build and operate one of the world' largest integrated chemical facilities on the Persian Gulf coast of Saudi Arabia.
Lower natural gas prices should make Dow more competitive in global markets. Backing up that point, Dow recently said it would spend $1.7 billion to construct a new world-scale ethylene production plant in Freeport, Texas.
Dow moved to the top of our chemical makers’ candidates list in April when it raised its quarterly dividend by 28% to $0.32 per share, bringing its yield up to 3.8%. Dow can afford dividend hike. Last year it generated $3.9 billion cash from its operations compared to $1.3 billion paid out to shareholders.
Rentech Nitrogen, a November 2011 IPO, is organized as a master limited partnership (MLP). Although not corporations, MLPs trade on major exchanges just like regular stocks.
MLPs often pay high dividends because they don’t pay federal income taxes. Instead they distribute their earnings to shareholders.
Typically, the general partner receives a percentage of the profits before the limited partners get their cut. However, Rentech Nitrogen is the exception to that rule. Its general partner, Rentech, Inc., is not entitled a cut of its cash flow.
Rentech Nitrogen produces nitrogen fertilizer products at its facility in East Dubuque, Illinois. Although U.S. natural gas prices are near historic lows, that is not the case abroad.
For example, in Europe natural gas is going for more than $11 per million BTUs and in Japan, they’re paying close to $16 per million BTUs. This, U.S.- based fertilizer maker enjoy a huge cost advantage.
Even better, since Rentech’s plant is located in the farm belt, close to most of its customers, its finished products transportation costs are nil, it a competitive advantage over other U.S. producers.
Based on current forecasts, Rentech will pay distributions this year equating to a 10.6% yield and we expect around 10% annual distribution growth.
Learn more about this financial newsletter at Harry Domash's Dividend Detective.