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ENGlobal Corp. (ENG) Well-Positioned to Exploit Natural Gas Pipeline Demand

According to the most recent published natural gas supply data from the U.S. Energy Information Administration (January 2012), we had technically recoverable resources of around 2,266 trillion cubic feet (tcf) of natural gas here in the country, enough to last us more than 92 years at then-current consumption levels. Sustained growth in proved reserves, driven by mounting discoveries primarily from shale exploration, as well as conventional/tight onshore, with coalbed methane and offshore accounting for only a minimal portion, is a clear indicator according to EIA estimates that this healthy buffer of natural gas supply will be maintained for the foreseeable future, so long as we continue exploration and development.

EIA’s Annual Energy Outlook 2015 projections indicate a considerable increase through 2040 for dry natural gas and gas plant liquids production, with average annual production growth increasing at a faster rate than crude oil and lease condensate by as much as 72 percent, faster than everything in fact, except for renewables. With supply, disposition and price growth figures for natural gas at Henry Hub outstripping other energy sources like coal or oil by nearly a factor of two, it seems inescapable that natural gas will continue to play an increasingly vital role in not only domestic energy consumption, but also the energy export market, where natural gas is projected to enjoy nearly 6 percent growth through 2040, hitting upwards of 4.5 percent by as early as 2020.

None of this is news to Houston-headquartered ENGlobal Corp. (NASDAQ: ENG) of course, which specializes in a wide variety of upstream, midstream and downstream oil and particularly gas automation integration, as well as EPCM (engineering, procurement and construction management) solutions, via its network of strategically-located facilities around the country. ENGlobal saw solid returns for its automation segment in 2014, with continued levels of spending by the company’s midstream and downstream clientele being a major contributing factor and the company has weathered the storm of lower commodity prices thus far in 2015 as well, even showing considerable appreciation of operating profit margins for its EPCM segment. The secret to ENGlobal’s success is really no secret at all, considering how major industry players continue to seek the company out for their impeccable safety record and ability to achieve full-spectrum design, engineering, construction management and procurement services.

Because natural gas-fired power plants are a clean backdrop source for electrical production, they represent the most obvious solution to addressing the deficiencies of renewables like solar or wind, and can be quickly scaled (unlike nuclear) and fired up when the sun isn’t shining or the wind isn’t blowing. The only thing really missing for the natural gas factor in the overall domestic energy equation is the pipeline infrastructure needed to make good use of all our natural gas, as well as the increased LNG/CNG plant capacity needed to ramp up exports, and satisfy increasingly diverse domestic sources of demand. More than $150 billion or more has already been spent on domestic natural gas distribution infrastructure and yet as much as 46 percent of pipeline capacity currently sits idle for a variety of reasons. The most pertinent portion of this idle capacity is due largely (and paradoxically) to stalled development of other pipelines and plants, which are needed to make use of existing infrastructural capacity. A good example of this phenomenon is Pennsylvania, where almost as much as 19 percent of existing wells were idle last year, due primarily to lack of natural gas pipelines needed to tie production in to.

The incredible supply and demand fundamentals in regions like the northeast, highlighted by data points such as around 44 percent of New England’s electrical energy production coming from gas-fueled generators last year, are a major driver behind increased natural gas pipeline infrastructure activity. The announcement last week of an $80 million investment by diversified energy delivery giant UIL Holdings (NYSE: UIL) in Kinder Morgan’s (NYSE: KMI) Northeast Energy Direct interstate pipeline project – which seeks to put down some 200 miles of new transmission lines, leveraging the Marcellus shale fields of Pennsylvania in order to bring gas to northeastern markets in Massachusetts, New Hampshire and New York state – is just the tip of the iceberg when it comes to ongoing and necessary infrastructural development.

A great deal more of such development is needed to connect existing and emerging fields to energy markets throughout the U.S. and ENGlobal is banking on being one of a handful of unquestionably trustworthy providers of the crucial automation integration and EPCM work needed to realize the necessary objectives. The announcement earlier this year by midstream company ONEOK Partners (NYSE: OKS), that they suspended development on the Demicks Lake gas processing plant designed to service the Williston Basin, as well as two others due to commodity market conditions and subsequently foreseen lack of natural gas volume growth, hasn’t stalled the associated Demicks Lake pipeline from MDU Resources Group (NYSE:MDU), which is now in Federal Energy Regulatory Commission environmental assessment.

ONEOK, which is in a position to quickly resume these projects when market conditions improve, based its rationale for halting plant development to some degree on pure logistics, and the lack of natural gas production volume growth. Even at lower prices, the Demicks Lake facility, as well as ONEOK’s Knox plant in Oklahoma and the Bronco plant in Wyoming’s Powder River Basin, are absolutely necessary when one looks at the broader national energy demand picture. However, the aforementioned lack of a truly robust domestic network of pipelines has forced regions like the northeast into using gas-powered generators. Ironically, one of the major factors in stalling the development of national pipeline infrastructure, which has led to the use of environmentally unfriendly gas and diesel generator usage increases in the northeast, has been protest by environmental groups.

The real underlying problem is throughput itself and ENGlobal has shored-up its operational footprint in order to be ready to capture demand, operationally delimiting bottom line impact due to falloff in upstream related orders, and rounding out its Q1 (ended March 28) with a healthy cash position of $24.4 million, $5.1 million in notes receivable collected after the end of the quarter, and zero borrowings under its current credit facility. Leaner and meaner, with a more focused operation, lower overhead costs and a significantly reduced project risk profile, ENGlobal is well-positioned to capitalize on sustained infrastructure demand, especially as we round the corner towards fall and winter months. ENGlobal’s full-spectrum project delivery capabilities, as well as elements like its Government Services group specializing in turnkey automation and instrumentation systems for global U.S. defense industry interests, make the company a real contender in this environment. Investor’s should keep a close eye on ENG as we head towards the exit on this year’s summer natural gas storage injection season. Especially after last year’s bitter cold weather throughout the U.S., which led to record-breaking natural gas withdrawals.

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