Investing is like driving, in the sense that if you do it by looking only in the rear-view mirror, you will crash. The recent past is not necessarily a good guide to the future, even if it has the advantage of having the most complete and accurate set of numbers that can be plugged into a spreadsheet.

This is a necessary preface to a recommendation of a partnership that has paid out no distributions yet but is cheap relative to the cash flow it could be pumping out by this time next year.

OCI Partners (NYSE: OCIP) is a producer of methane and ammonia at a single plant on the Texas Gulf coast. The facility was mothballed in 2004 amid high natural gas prices, and restarted in 2012 by OCIP’s sponsor, OCI N.V. (OTC: OCINY).

OCI N.V. is the Netherlands-listed chemicals, fertilizer and construction conglomerate controlled by the Egyptian billionaire Nassef Sawiris, who is investing heavily in an expansion of his company’s productive capacity in the US. The acquisition and restart of the Beaumont, TX plant owned by OCI Partners was his opening move in this gambit, followed by an IPO that floated a 21.7 percent stake in the partnership in October, with OCI N.V. retaining the remainder of the limited partner units as well as the controlling general partner interest.

The global market fundamentals for methanol and ammonia have changed drastically since a wave of chemical plant closures in the US 15 years ago painfully consolidated both industries. Methanol, a petrochemical commodity used to make formaldehyde, adhesives, resins, solvents and transportation fuels, is once again in short supply and growing demand, with prices escalating more than 25 percent over the last year. Ammonia has received a big boost from the US mandate for expanded use of ethanol, since the primary use of ammonia is for nitrogen fertilizers used to grow corn.

The primary input and the main cost factor in the manufacture of both methanol and ammonia is natural gas. The surplus of cheap gas from new shale basins has given the surviving US chemicals producers a major cost advantage and spurred a wave of new construction projects that won’t crest for several more years.

Because methanol and ammonia prices can be very volatile, it’s hard to know how long the current uptrend will last. But there’s good reason to believe that methanol, especially, can go significantly higher.

Methanol demand is closely linked with global industrial production, which was on an upswing before the recent panic in emerging-markets. Two-thirds of recent methanol output has gone into the production of formaldehyde and other basic petrochemical building blocks, with the rest used in energy-related applications.

Formaldehyde is especially useful in auto making and construction, two industries on a cyclical upswing in the US. But energy applications are becoming increasingly important growth drivers as well, because blending methanol into gasoline, as is permitted abroad (but not in the US) can produce significant savings for refiners. Methanol can also be turned into a very clean-burning transportation fuel known as dimethyl ether, or used to economically replace crude-derived naphtha in the production of olefins, as has been happening increasingly in China.

Source: Methanex corporate presentation

Global demand has compounded at a 5 percent annual rate since 2000 and some expect it to accelerate to 7 percent annually over the next three years. China accounts for more than 40 percent of global consumption as well as production, and its expensive methanol derived from coal has set a price floor for lower-cost producers elsewhere.

Production capacity is increasing too, of course, but is constrained by a shortage of cheap inputs in most overseas locations. Meanwhile, the frantic expansion now under way in the US is not expected to fully satisfy domestic demand as late as 2016, even though the US recently accounted for less than 10 percent of global methanol consumption.

Source: OCI Partners presentation

What does all this global bullishness mean for OCI Partners? It means that a major “de-bottlenecking” (i.e., capacity expansion) project due to be completed late this year at the Texas plant is expected to recoup the investment within at most three years.

But before we delve into the potential rewards, here are the risks. They start with full exposure to the  price movements of methanol, ammonia and natural gas, none of which OCI Partners appears to have hedged. Its delivery contracts also don’t lock in any price protection. As a result, OCIP is one of those variable-distribution MLPs that does not guarantee any distribution whatsoever, only promising to pay out what it earns minus a small set-aside for routine maintenance.

On the plus side, the partnership should end up earning quite a lot, barring an unforeseen market upheaval. In the year ended June 30, which included not quite nine months of production at the current maximum rate, OCI Partners earned enough to distribute $1.74 per unit. That’s forecast to increase to $2.15 per unit for the 12 months through Sept. 30, 2014, despite the expected 40-day shutdown associated with the de-bottlenecking late this summer.

In the fourth quarter of 2014, expansion of the methanol production capacity by 25 percent and of the ammonia capacity by 15 percent is forecast to boost the distribution to $0.868 per unit.  Boiling all of this down, based on the Jan. 31 closing price of $25.85, the prospective yield is 8.3 percent  for the year through September of this year, and 13.4 percent annualizing the expected fourth-quarter payout after the de-bottlenecking is completed.

Source: OCI Partners IPO roadshow presentation

Note that this forecast assumes an average netback price of $440 per ton of methanol, which already accounts for two-thirds of OCI Partners’ revenue and should make up an even bigger share after the upcoming capacity expansion. That’s also the price OCIP got for its methanol in the third quarter of 2013. But global methanol prices have continued to climb since. Leading global methanol supplier (and key OCI Partners customer) Methanex (Nasdaq: MEOH) has raised its posted US methanol price by 15 percent just since October.

Of course, some of that potential windfall could be lost to higher natural gas prices, since that main input accounts for more than half of the partnership’s costs. An increase in the price of natural gas of $1 per million British thermal units would cost OCIP an additional $31 million a year, about what the partnership stands to gain from a methanol price increase of $43/ton.

While OCIP has not hedged its energy costs, it provides a nice natural hedge for MLP portfolios that typically profit from higher energy prices.  Another positive is that OCI Partners does not owe its sponsor incentive distribution rights, removing that growth curb and potential conflict of interest.

The business of making methanol in the US looks promising enough that OCI N.V. now plans to build a new plant in Beaumont with nearly twice the capacity of OCIP’s facility, which would make it the largest methanol plant in the US. Other producers are following its lead by restarting older plants mothballed last decade.  But gains in global demand should swamp those increases in capacity, and OCIP could be in line for significant capital appreciation in addition to its rich distributions. We’re adding it to our Aggressive portfolio. Buy OCIP below $29.

UGI Bets Big on Propane

Methanol is hardly the only commodity benefiting from the arbitrage between the high price of crude oil and the lower cost of alternatives derived from the booming production of shale natural gas. Propane, a heating fuel made by purifying, or “cracking,” natural gas liquids, has+ also appreciated rapidly recently, boosted by cold weather, rising exports and a big spike in agricultural demand, as inventories fell below the bottom of their range over the past five years. Propane for residential delivery recently topped $4 a gallon, nearly double the price a year ago.

Source: US Energy Information Administration        

While the cold weather has been a costly drag for heating customers, it will likely prove a big plus for leading US propane distributor AmeriGas Partners (NYSE: APU), which serves more than 2 million clients from some 2,500 distribution hubs spread across all 50 states and has a 15 percent market share .

For all the volatility of the underlying commodity, propane distribution is an impressively stable business, serving customers who typically have few attractive alternatives and, in the case of Amerigas, reaping economies of scale enhanced by the 2012 acquisition of rival Heritage Propane from Energy Transfer Partners (NYSE: ETP).

Domestic demand for propane has declined by an average of 2 to 3 percent annually in recent years, hurt by improved energy efficiency of appliances and building materials as well as customer conservation efforts. Yet, despite big swings in the wholesale price of propane, Amerigas has more than made up for that decline by steadily increasing its unit margins, from a little over 60 cents per gallon in 2005 to more than $1 per gallon last year. Margin expansion has been drive by a focus on big national accounts, a growing propane cylinder exchange business and merger synergies.

Source: AmeriGas Partners presentation

This year, those increased margins will be multiplied by the many more gallons sold as a result of the unusually cold heating season. After setting its goal of growing EBITDA (cash earnings) at 3 to 4 percent annually as recently as September, AmeriGas surprised analysts by forecasting growth of nearly 7 percent in 2014 when it wrapped up its fiscal year in November.

First-quarter results reported Feb. 3 were in line with that guidance, as AmeriGas passed on its higher wholesale prices to customers.

Last week AmeriGas declared a quarterly distribution of 84 cents a share representing a 5 percent year-over-year gain and a prospective 7.8 percent yield at the Jan. 31 closing price, though another raise should be forthcoming in May. Given the business fundamentals, distribution coverage on that payout should improve on last year’s healthy 1.2x ratio.

Unlike some of the other propane players in a position to profit from rising exports, AmeriGas has seen no price appreciation over the last year, and is in fact down 14 percent from the two-year high units registered in late June. The price has been held in check by Energy Transfer’s gradual disposition of the AmeriGas units it received as part of the Heritage merger, which has now reduced its stake in AmeriGas to 14 percent. But with industry fundamentals improving, weather cooperating and a rich, secure yield beckoning I expect better trading performance in the near future. We’re adding AmeriGas to our Growth portfolio. Buy APU below $51.

The biggest blemishes on AmeriGas are its already mentioned lack of exposure to propane export logistics but also the incentive distribution rights (IDRs) it owes to its general partner UGI (NYSE: UGI), which also operates a utility providing natural gas (mostly) and electricity to some 660,000 customers in Pennsylvania.

UGI owns 26 percent of AmeriGas, good last year for $96 million in distributions (including $19 million in IDRs) from its subsidiary. That represented just over half of all the distributions netted by UGI from its affiliates. A third of the UGI’s haul from affiliates came from its utility, which grew revenue 7 percent and operating income 13 percent last year as a result of more seasonable winter after a very warm 2012. The gas utility expanded its customer base by nearly 3 percent last year, accelerating recent growth with the help of conversions from heating oil to the cheaper natural gas.

UGI has also been expanding a European propane distribution business that’s now has revenue two-thirds the size of AmeriGas (albeit with less than half the profitability.) Once focused primarily in France, UGI has used acquisitions to diversify into the faster growing northern and eastern Europe, most recently entering Poland.

Perhaps most intriguingly, it also has an Energy Services unit involved in the marketing of power and natural gas as well as gas gathering and storage services in the Marcellus, using its gas distribution network as the backbone for expansion projects. This midstream segment offers perhaps the greatest upside potential, as it invests in links between the hyper-productive Marcellus wells and UGI’s overlapping utility footprint.

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Despite the growing midstream capital expenditures, UGI still generates $125 million a year of free cash flow. Those profits underpin dividends that UGI has paid for the last 129 years, including 26 straight annual increases. The current yield is 2.6 percent, and UGI aims to grow its payout 4 percent annually.

It aims to increase its earnings per share (EPS) 6 to 10 percent annually. This year’s forecast calls for EPS growth of 8 percent, for a forward price-earnings ratio of 16. This compares with a forward p/e of 18 for the much larger Dominion (NYSE: D), which is not growing as fast, and is also twice as expensive as UGI based on the ratio of its enterprise value to EBITDA.

Over the past year, UGI shares have advanced 20 percent, lagging a bit behind Dominion. But over the last 20 years UGI has averaged an annual total return of 13 percent, half again as much as the S&P 500 and double the average for large-cap utilities.

This is a record worth buying, and it’s reasonably priced given the potential growth opportunities and synergies available to UGI’s businesses. We’re adding the stock to the Growth portfolio. Buy UGI below $50.