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Why the US shale revolution drives natural gas–producing MLPs

Ingrid Pan, CFA

Natural gas gathering and processing: A major business for many MLPs (Part 3 of 7)

(Continued from Part 2)

Increased production

One factor that has been driving major growth in the natural gas gathering and processing arena is the increase of natural gas production over the past few years.

Natural gas production growth in the U.S. has been driven by the “shale revolution.” The shale revolution generally refers to the widespread application of new technologies such as hydraulic fracturing and horizontal drilling to develop areas that were previously uneconomic to drill. With the adoption of these new techniques, plays such as the Haynesville Shale (where Chesapeake is increasing drilling this year, see Where will Chesapeake concentrate its drilling activity?, with natural gas gathering and processing being serviced by Access Midstream Partners) in North Louisiana and the Marcellus Shale in Appalachia were “discovered” and upstream companies rushed in to produce natural gas.

In some of these new plays, there was little infrastructure to gather and process natural gas, creating a significant opportunity for midstream companies to come in and build up the necessary infrastructure, grow their asset base, and generate returns to unitholders.

For example, certain areas of the Marcellus Shale in Appalachia are considered to be the U.S. premier natural gas assets due to extremely flush production as well as a high content of natural gas liquids. MarkWest Energy (MWE) is one of the companies with the most exposure to this region, and it has invested significant amounts of capital for natural gas gathering and processing there, as well as of natural gas liquids takeaway and logistics. MWE’s stock price has increased from ~$11 per unit in March 2009 to ~$64 per unit currently (which doesn’t take into account distributions over the years). Book assets for the company increased from $2.7 billion at the end of 2008 to $9.4 billion at the end of 2013 as well.

Natural gas gathering is also in demand in areas where oil and liquids production is the goal, such as the Eagle Ford (where MLPs such as Regency Energy operate), as natural gas is often a significant part of the total stream of hydrocarbon production.

The increase in drilling and production affects natural gas gathering and processing names across the board, including Regency (RGP), MarkWest Energy (MWE), Access Midstream (ACMP), and Targa Resources (NGLS), which are all components of the Alerian MLP ETF (AMLP).

Read on to the following part of this series to learn about other trends affecting natural gas gathering and processing operations.

Continue to Part 4

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