Where to Invest While You Wait for Natural Gas Prices to Heat Up
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While natural gas prices have seen a bit of an uptick of late, they are still around multi-year lows and at prices that don’t make drilling as profitable. Yet, we know that our energy future here in America in the short to medium term will be fueled by natural gas while we hope for longer term solutions to arise in bio-fuels, hydrogen and other renewables.
One of the more stable investment opportunities can be found in the “toll booth” type business models that midstream energy companies provide as they are not as dependent on the price, but instead have contracted volumes that produce fairly steady returns. While there seems to be a new shale basin emerging every day, one of the biggest and potentially most lucrative of the past few years is the Marcellus Shale. Emerging just beneath the Marcellus is the Utica Shale and together they are strategically located close to the population centers of the northeast.
A critical component in developing the vast resources found in the Marcellus and Utica Shale will be in this midstream transportation infrastructure. One company that is beginning to emerge in the region is MarkWest Energy Partners (NYSE: MWE). They’ve been quietly very active in the region and are building out a very competitive set of assets. Recently they acquired Keystone Midstream Services, which was partially owned by Rex Energy (NASDAQ: REXX), and included two cryogenic gas processing plants, a gas gathering system, and associated compression equipment. Rex has dedicated 895 square miles on their 68,400 leased acres to MarkWest, which will gather and process the rich gas as well as fractionate the NGL's under a long term agreement. These assets are located in an area that contains the more lucrative rich gas and associated natural gas liquids as opposed to just dry gas at its sub $3 prices. This deal comes just days after announcing a significant long term deal with Chesapeake Energy (NYSE: CHK) in which MarkWest is increasing the capacity on one of their processing plants as well as building two cryogenic gas plants to support Chesapeake’s production needs.
While I am most interested in MarkWest’s growing Marcellus/Utica assets, they are diversified across many resource basins from the Southwest through the Gulf Coast and up to the Northeast. This has given them access to some of the fastest growing production basins in the Southwest, such as the Granite Wash and Haynesville. In order to support this production growth, they have several projects under construction and many of them focus on liquids.
With more infrastructure already in place in the south, building out the liquids in the north and connecting them to the south will be a key to unlocking our resource potetnail. One asset to watch is their project to connect with Sunoco Logistics (NYSE: SXL) in Mariner West. This pipeline system is creating a comprehensive ethane solution by developing an efficient and scalable project that will provide access to the attractive NGL markets in North America and Europe. This project, along with a project being developed by Enterprise Products (NYSE: EPD) called ATEX Express, will be transporting the ethane from the rich gas produced in the Marcellus and Utica Shale to the US Gulf Coast. These projects will really help producers in the area find a market for NGLs they are increasingly drilling for as they wait for dry gas prices to improve.
Aside from their diverse asset base, the biggest advantage that MarkWest has over its peers is the significant first-mover advantage in the Marcellus and Utica Shale. They have key producer production commitments from the likes of Rex and Chesapeake as well as others giving them acreage dedications in excess of 400,000 liquids-rich acres. They also have critical gathering, processing, transportation, fractionation, storage and marketing infrastructure already in place and are adding to it with bolt-on transactions. They really are right in the thick of things and acquiring assets like Keystone fit perfectly in their system. Their new joint venture in the Utica areas of Ohio have them building 200 MMcf/d of cryogenic processing and 100,000 Bbl/d of fractionation, storage and marketing which help drive the development of this exciting new resource play.
MarkWest has been able to maintain a very strong financial profile despite completing over $5 billion worth of expansion projects and acquisitions since their IPO in 2002. They’ve been able to maintain a debt to capital ratio of 49% with adjusted EBITDA to interest expense of 5.5 times and debt to adjusted EBITDA of 2.9 times thanks to their relationships with their joint venture partners as well as their ability to raise equity capital. Growth projects over the past few years are continuing to come online and are now producing more cash flow for unit holders. Over the past year they have raised their distribution to shareholders by nearly 18% while still maintaining a coverage ratio of 1.35 times. For unit holders they still have a bit more upside in the yield as a ratio of 1.3 is viewed as a good target. Shareholders also benefit from the fact that there is no general partner taking any incentive distribution rights, which helps keep their cost of capital skewing toward the low end of the industry average.
MarkWest has a pipeline full of projects that should fuel unit holder distributions for many years. They are a first mover in the Marcellus and Utica Shale areas providing desperately needed midstream assets. MarkWest is a not only a great company to invest in while you wait for gas prices to heat up, but they are emerging as an interesting way to invest in growth of the Marcellus and Utica Shale.
latimerburned owns shares of Enterprise Products Partners L.P. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Enterprise Products Partners L.P.. 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.