3 Companies 'Cracking' in the Marcellus Shale

Includes: DOW, RDS.A, SSL
by: Investment U

By Mike Kapsch

As millions of Americans brace for a slew of new potential taxes next year, Shell – the U.S. subsidiary of Royal Dutch Shell (NYSE:RDS.A) – is contemplating which state it wants its next big tax break from.

West Virginia passed legislation in January that would give Shell a 25-year property tax break if it sets up a new $2-billion operation there. And according to the Associated Press, “Pennsylvania offered 15 years, and Ohio has reportedly offered major incentives.”

It should be no surprise these states are competing to win Shell over. After all, they’re located in the heart of the Marcellus Shale region, the largest shale gas deposit in the world. And as CBS News reports, Shell “would create 12,000 jobs, both direct and indirect” and “provide $600 million in wages annually.”

But you may be surprised to know that Shell isn’t preparing to start fracking for more natural gas in this region. Instead, it’s going to start “cracking” it.

Shell gets cracking

Last month, I wrote about how cheap natural gas is creating a number of opportunities to profit in the plastics industry. As I explained, ethane is a natural component of natural gas. And through various cooling and heating procedures, can be turned into ethylene, one of the primary building blocks for producing plastics.

Facilities that specialize in turning ethane into ethylene are called cracking plants. For Shell, its newest cracking facility will be the fifth plant it will have set up in the United States. And the best part…. it’s just one of many plants about to be built.

Cracking plants going viral

The Associated Press says several other companies are interested in building cracking facilities in the Marcellus Shale region.

But there are also several plans in the works to build cracking plants all around the nation.

Bloomberg reports, “Chevron Phillips Chemical Co. plans to spend about $5 billion to build an ethane cracker in Texas, while Dow Chemical Co. (NYSE:DOW) and Sasol Ltd. (NYSE:SSL) each plan to spend as much as $4.5 billion on crackers in Louisiana.” And those are just a few examples.

The road ahead

It’s bigger companies like Shell, Dow and Sasol that stand to benefit most from building cracking plants over the coming years. That’s because most state tax breaks are only for companies prepared to invest at least $1 billion in building these already expensive facilities.

But with natural gas prices so low, the cost to turn ethane into ethylene is much cheaper than it was just a few years ago. And companies that specialize in this are set to boost profit margins a great deal as more cracking plants get built around the United States.

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