Increasing Marcellus production positive for midstream names in the area

2013.04.19 - Pennsylvania Natural Gas Production cEnlarge Graph

  • The Marcellus Shale is one of the premier natural gas basins in the US and most expect production in the prime areas of the Marcellus to continue to increase in the coming years despite currently depressed natural gas prices.
  • Increased production in the area necessitates midstream infrastructure, which is positive for MLPs with assets located in the Marcellus.

The Marcellus Shale is one of the most prolific shale resources in the US. Though production from the Marcellus is mostly natural gas, which has suffered from low sustained prices over the past several years, certain prolific and NGL-rich (natural gas liquids) portions of the Marcellus are still profitable to produce. Because of this, most market participants expect production from the Marcellus to increase over the next several years and far future despite the prohibitive gas price environment.

As evidence to confirm the projected production growth in the Marcellus, Range Resources reported that its Marcellus division produced 613 mmcfe/d in 4Q12, out of total company production of 844 mmcfe/d. RRC also notes that over the foreseeable future (that is several years out), it expects companywide production growth of 25-30% per year with the Marcellus being a major growth engine. The Pennsylvania Department of Environmental Protection noted that in 2012, ~6.1 billion cubic feet per day of gas was produced, therefore with 4Q12 Marcellus production of 613 mmcfe/d, RRC’s production was a substantial portion of total production in Pennsylvania during 2012, and one can expect that strong production growth from RRC will be paralleled by production growth in the Marcellus. Range also recently announced record 1Q13 production, driven primarily by increased Marcellus production.

Additionally, Cabot Oil and Gas (COG), another independent operating in the Marcellus also stated plans to accelerate activity in the area. A recent presentation from the company noted that during 2013 it planned to spud ~85 wells, up from ~70 wells in 2012.

Midstream companies with assets in the area should be able to benefit from increased drilling activity and production as more infrastructure (such as gas gathering systems, gas processing and transportation, NGL fractionation, etc.) will be required. Confirming this, MarkWest noted on its last earnings call, “We continue to experience tremendous growth in the Marcellus Shale. Processed (gas) volumes during the fourth quarter rose an impressive 45% when compared to the last quarter and 86% when compared to the fourth quarter of 2011. Together, volumes increased 10% quarter over quarter and 66% compared to the prior-year quarter due to the connection of Range Resources’ highly successful super rich wells in Washington County, Pennsylvania.”

The continued strength in Marcellus production growth should provide upside opportunity for names such as Williams Partners (WPZ), MarkWest Energy Partners (MWE), and PVR Partners (PVR) who have operations there. The forecast increase in Marcellus production is therefore a long-term positive catalyst for the aforementioned midstream names. MLP ETFs such as the Alerian MLP ETF (AMLP) also have exposure to the aforementioned midstream names.