Who’s Positioned to Win if New York Fracks?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A proposal by New York State Gov. Andrew Cuomo’s administration to allow limited hydraulic fracturing in several southern tier communities has the potential to open up vast tracks of land for the energy industry to drill. The controversial proposal would only permit drilling in communities that agree to allow it while also banning it in Catskill Park, aquifers and in nationally designated historical districts. If the proposal is ever enacted, which companies are best positioned to take advantage?
Because no company is currently drilling horizontally in New York, not many companies are disclosing their positions in the state. While I was able to dig up a handful of companies with acreage there, one company in particular has a very compelling position and I think they have the best chance of benefiting if the new rules go through. But first, who has leased acres in New York?
Unsurprisingly, as one of the most active explorers for natural gas in the nation, Chesapeake (NYSE: CHK) has a position in New York’s Marcellus shale. They are not currently drilling any wells in the state thanks to the regulatory process. However, if the governor’s proposal does go through, Chesapeake would now be able to partner their acreage with a large multi-national. While this would give the troubled company a much needed cash infusion, it’s unlikely to move the needle for the number two producer of gas in the US.
The top natural gas producer in the US, ExxonMobil (NYSE: XOM), through their XTO Energy subsidiary, also has a position in the New York Marcellus. However, as one of the largest companies in the world by market capitalization, being allowed to drill in New York would be an afterthought for the company. They do however have very deep pockets and could build a very sizable position in the state if conditions become more favorable.
Talisman Energy (NYSE: TLM) also has an acreage position in New York, but had this to say: “In New York, the state proposed new rules for drilling, which are expected to be finalized early 2012. The state has imposed an off-limits buffer around its waterways due to environmental concerns. Talisman has no immediate plans to drill in New York and will continue to review its environmental assessment procedures and regulations for operations.”
While Talisman has a market cap about the size of Chesapeake, they have a much more globally diverse portfolio. Being able to produce from their New York acres would certainly benefit their bottom line, but it won’t add too much fuel to their stock price.
With most of these major players gaining their toehold positions just before New York put a moratorium on fracking a few years ago, one company has been active in New York for over a century. National Fuel Gas (NYSE: NFG) was incorporated in 1902 and has the following four business segments: Exploration and Production, Pipeline and Storage, Utility and Energy Marketing. It’s their E&P subsidiary, Seneca Resources, that I think could reap the biggest benefits from New York. Even though a majority of their Marcellus acreage is in Pennsylvania, it does stretch into the southern tier of New York.
They had already amassed 700,000 acres before the play started to receive attention and have added another 45,000 acres in the years since. They were looking to partner with Hess (NYSE: HES) on up to 30,000 acres back in 2009, but ventures like those where put on the back burner due to the state’s stance on fracking. Further, they have producing conventional acres in the western part of the state that sits above the Utica Shale adding more acres to their portfolio. If the New York opens up to fracking, the potential is there to unlock some major value for the company.
It is not just the value creation potential from their acreage position in the state that is interesting, they have a strategic pipeline and storage position that runs all through their acreage. This gives them an advantage over anyone moving in the area, they can first service their Seneca Resources segment and then sell any excess capacity to a competitor. From there they can either feed the gas to their utility or sell it on the open market. They have an enormous advantage that investors should not overlook.
National Fuel Gas has been busy cleaning up their portfolio over the past few years, which has seen them selling their landfill gas business, their Canadian and Gulf of Mexico assets, as well as their timber and sawmill assets. This additional cash to reinvest into their core businesses makes them a compelling investment. Even if New York doesn’t allow them to drill on their leased lands they’ll still grow production by 41% annually through 2014, enabling them to double their forecasted cash from operations over that timeframe. No matter what the politicians decide, National Fuel Gas is strategically positioned to take advantage of their integrated system to deliver gas from the well head to the burner, profiting from each link in the value chain.
latimerburned has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. 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.