Natural gas. So much, so close, and yet so far away. Such is the quandary freezing U.S. East Coast residents found themselves in last January when the polar vortex blew in.
On January 21 the spot price for natural gas in New York City spiked to $123.00/Mcf. But, 100 miles away, in Pennsylvania's Marcellus shale region, one of the most prolific gas producing areas in the country, prices languished around $3.50/Mcf. What gives?
The thing is, natural gas must be processed and then transported to consumers by pipelines. Oil and coal can be moved by truck or rail if need be, but natural gas (short of being compressed and cooled, which is very expensive) must use pipes.
In the Marcellus there is, all of sudden, record amounts of gas coming out of the ground (see chart), but the infrastructure to process, store, and transport it to market is woefully inadequate. Since utilities are burning a lot more gas than they did in the past to generate electricity, big problems can arise when gas demand spikes.
Chart Source: Wikipedia
Now, in early March, natural gas markets have calmed. The benchmark Cushing price, after spiking to almost $6.50/Mcf on February 24, is back to where it started -- around $4.50Mcf. The cold weather, however, depleted storage levels which are now well below five year averages for this time of year. The extent to which storage builds back up this spring is uncertain.
The oil and gas industry is, of course, anxious to profit from Marcellus gas -- but it will take time.
Here are two companies should be in an excellent position to profit from Marcellus gas once adequate infrastructure is completed.
Spectra Energy Corp. (SE) is a $25 billion (market cap) U.S. natural gas utility. The company gathers, processes, transports, stores, and distributes natural gas across much of Southern Canada and the Central and Eastern U.S. Spectra's pipelines and other infrastructure are strategically located for bringing gas to the high-demand markets of the East Coast.
Chart Source: Spectra Energy
Spectra has placed its pipelines and other infrastructure into two publicly traded Master Limited Partnerships -- MLPs: Spectra Energy Partners (NYSE:SEP) and DCP Midstream Partners LP (NYSE:DPM). Spectra owns approximately 82% of SEP's limited partner interests plus it has a 2% general partner interest. Spectra also owns 50% of DPM.
SEP has two large pipeline enhancement projects in the works. Over the next few years it will bolster both its Texas Eastern Transmission Pipeline (New York and New Jersey) and later its Algonquin Gas Transmission System (New England). Both these pipeline enhancements will bring much needed Marcellus gas to customers in the Northeastern U.S.
Spectra raised its annual dividend nearly 10% in January. The current yield is 3.6%. Investors who don't the mind the more complicated MLP tax structure (K-1 forms) might consider investing in SEP. The MLP currently yields 4.5% and may have a more stable distribution than Spectra as its income is fee based so not dependent on commodity prices.
Cabot Oil & Gas Corporation (COG) is a $14.7 billion dollar (market cap) U.S. E&P. The company is one of the largest producers of natural gas in the U.S. and has its core operations in the Marcellus and Eagle Ford shales. Cabot now considers the Marcellus to be its "cornerstone asset" and the Pennsylvania play now accounts for nearly 80% of the company's proved reserves and 85% of production. The company allocated 65% of its 2013 capital budget for the Marcellus.
Chart Source: Cabot Oil and Gas Website
Last December Cabot announced an agreement to provide Marcellus gas for export to Maryland's Dominion Cove Point LNG Terminal. Since natural gas prices in Europe are over $11/Mcf, more than twice those in the U.S. the profit potential is big. Export operations at this original LNG import terminal may begin in 2017. The conversion is expensive and controversial - it's not a sure thing.
Just recently Cabot beat earnings estimates and announced a 42% increase in reserves. Good news? Not according to Wall Street, which perhaps expected better -- the stock is down 10% since the announcement. The drop may now present investors with a good entry point.
Conclusion and Summary
Five years ago fracking unleashed a flood of natural gas into North American markets and prices are still depressed. Demand (and prices), however, will inevitably rebound as industry, utilities, and transportation continues to gravitate to this cheap, clean fuel.
Spectra Energy and Cabot Oil and Gas are both in an excellent position to benefit as the U.S. taps into the Marcellus. Keep in mind, the Marcellus is located practically next door to one of the largest energy consuming regions in the world: the U.S. East Coast.
Disclaimer: This article is intended to be informational only and should not be taken as investment advice. Do your own due diligence.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.