The Marcellus Moves Up the Value Chain by Going Downstream
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last month it was announced that Royal Dutch Shell (NYSE: RDS-A) was signing an option on a site to potentially build a petrochemical cracker plant in Southwestern PA. This plant would take the wet gas found in the Marcellus and Utica Shale of western PA and eastern Ohio and turn it into usable chemicals. The plant will also be the first of its kind in the region to take advantage of the supplies being produced from these two shales. For investors it’s important to look into the future that might be in order to be best positioned to take advantage of future profit potentials.
What is it?
The plant will be an ethane cracker and could also eventually include both polyethylene and mono-ethylene glycol units. The cracker would process the ethane which is a component found in the wet gas to produce ethylene, one of the primary building blocks for most petrochemicals. The polyethylene unit option for the cracker has the potential to produce an important raw material used in countless items from packaging to pipes. This is also part of a growing trend here in the US to take advantage of inexpensive feed stocks now available thanks to shale gas. Just recently Dow Chemical (NYSE: DOW) announced they were building a large cracker in Texas which will join the proposed Shell plant and become just the second plant built in the US in the last twenty years.
Why is it important?
The plant is just the first step in developing the infrastructure and offshoot industries needed to really turn the Marcellus into the game changing energy play that many think it can become. With the resource base and its related production in place, it now becomes about developing the value chain both upstream and downstream. The more value that is developed on the downstream side of things, the more valuable the gas under the ground becomes. While companies like Chesapeake (NYSE: CHK) have been working funding projects that will increase the demand for gas, those projects could be decades away from becoming mainstream. A plant such as the one proposed by Shell isn’t a new technology, instead it would be taking the feedstock produced and turning it the chemicals needed to build products here in the US. Those chemicals could then be used in to lower the cost basis in US manufacturing and create more jobs.
What will it mean?
While building this plant in southwestern PA will eventually be very profitable for Shell, it won’t be a game changer to move the needle on this quarter of a trillion dollar company. Where it could move the needle for example is in a smaller driller like Rexx Energy (NASDAQ: REXX) which has a very large position in the wet gas area just north of the proposed Shell cracker. Where it will really matter though is in bringing American manufacturing back online. One possibility that I will be watching is in a company like PPG Industries (NYSE: PPG) to see if they or a similar company announces plans to add on manufacturing capabilities here in the states. With the lower input costs from both natural gas and its related feed stocks as well as the chemicals produced from the proposed Shell cracker, there will be many growth opportunities in the years ahead for investors across all industries.
I’m becoming more interested in the chemical industry and the returns available thanks to the gas boom. This is a very long term story that will take years to play out. Investors need to keep a watchful eye to see which companies are in the best position for this long term opportunity as input costs go from a negative to a potential competitive advantage.
latimerburned has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.