How to Get Rich in Appalachia
In the most recent joint monthly web chat for subscribers of The Energy Strategist and MLP Profits a subscriber asked which midstream companies are likely to benefit from the recent surge in natural gas prices. I responded that companies with assets concentrated in the Marcellus Shale would likely do well, and gave EQT Midstream Partners (NYSE: EQM) as an example. In today’s article, I want to expand upon that answer a bit.
The Marcellus Shale is a black shale formation found largely underneath Pennsylvania, West Virginia, southern New York, eastern Ohio, and extreme western Maryland. Most Marcellus wells are drilled at a depth of 5,000 to 9,000 feet beneath the surface, and are then turned horizontally up to 10,000 feet. The wells are hydraulically fractured to release (primarily) the natural gas from the shale. Much of the Marcellus production to date has taken place in Pennsylvania, where the thickness of the formation ranges from 20 feet in the northwest of the state to more than 250 feet in the northeast.
The Utica Shale underlies large parts of the Marcellus, but the Utica also extends further west into Ohio. Above the Marcellus lies the Upper Devonian, and the entire region is part of the Appalachian Basin.
Just to put into perspective what a big deal this shale gas play is (if the explosive growth of Pennsylvania’s gas production is insufficient), the EIA estimated at the end of 2008 that Pennsylvania’s proved shale gas reserves were 88 billion cubic feet (Bcf), which is equivalent to less than a day and a half of US production.
By the end of 2012, the EIA had upped that estimate to 56,210 Bcf, a 639-fold increase. Over that same time span, West Virginia saw its own proved shale gas reserves increase from 14 Bcf to 28,311 Bcf. Ohio saw proved reserves go from zero in 2011 to 6,384 Bcf at the end of 2014. As for New York, if fracking wasn’t banned there it would likely look like Pennsylvania or West Virginia. But since fracking is banned there, its proved reserves are still zero, and residents will continue to rely on Pennsylvania for natural gas.
Because the region hadn’t been a major gas producer until recently, there have been logistical constraints in getting the fast-growing output to markets. While the Appalachian Basin sits near major East Coast markets, insufficient gas processing and pipeline capacity have often prevented producers from reaching those markets.
Therein lies the opportunity. Here is a sampling of midstream companies with assets concentrated in the region.
MarkWest, which is now a wholly owned subsidiary of MPLX (NYSE: MPLX), is the largest natural gas processor and fractionator in the southern Appalachian Basin. The company has six major complexes in the Marcellus Shale, and has the largest full-service midstream system in the core of the Utica Shale.
The afore-mentioned EQT Midstream Partners was formed by EQT (NYSE: EQT) to own, operate, acquire and develop midstream assets in the Appalachian Basin. The partnership’s operations are primarily focused on southwestern Pennsylvania and northern West Virginia, in the core of the Marcellus Shale. EQM was added to The Energy Strategist and MLP Profits portfolios in August 2013, and has returned roughly 80% since.
Rice Midstream Partners (NYSE: RMP) was formed by Rice Energy (NYSE: RICE) to develop midstream assets in the Appalachian Basin. RMP has secured dedications from its sponsor under a 15-year, fixed-fee contract for gathering and compression services in one of its core operating areas. At year end 2015, RMP owned a 3.3 million dekatherm-per-day (Dth/d) high-pressure dry gas gathering system and associated compression in Washington County, Pennsylvania and an 840,000 Dth/d high-pressure dry gas gathering system in Greene County, Pennsylvania.
As natural gas prices have heated up, the gas producers have been the most immediate beneficiaries. But in the longer run, higher gas prices are also highly beneficial to the midstream providers. We expect there will be a number of winners in this space.