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Why ECA Marcellus Won't Get To Recent Highs Soon

|Includes:ECA Marcellus Trust I (ECT)

(click to enlarge)ECA Marcellus Trust (NYSE: ECT) receives royalty interest from eight natural gas wells in the Marcellus shale formation in Green County, Pennsylvania. The trust also has six additional wells, which are nearing completion stage. Furthermore, the Trust has interest in 52 natural gas wells in the PUD (proved undeveloped) stage. It receives 90 percent of net proceeds (sale proceeds after deducting production costs) from the 14 producing wells, and 50 percent of the net proceeds from the wells in PUD stage, once they are commercially operational.

How Does ECA Marcellus Trust Make Money?

The Energy Corporation of America, a private company engaged in exploration, production and distribution of natural gas and oil, is ECA Marcellus Trust's premier revenue generator. Energy Corporation of America owns and operates around 4,600 wells across 1 million acres in North America alone. The company, which operates in six U.S. states, is now expanding to West Virginia also. The ECA trust released its results for the March 2014 quarter in May.

Digging Into ECA Marcellus Trust Performance

The cash distribution for the quarter was $0.33 per unit, down 7.7 percent from the previous quarter. The distributable income decreased 24 percent compared to same quarter last year, while royalty revenue was up 10 percent, from $5.9 million to $6.5 million in the current quarter.

The increase in revenue in the most recent quarter was largely due to the rise in gas prices across the industry in the last two quarters. On the other hand, production volumes continued to decline, falling 29 percent in volumes to 1,537 Mmcf for the same period.

Oil and gas trusts usually have declining cash distributions since the number of wells is fixed and the production declines each year till the well runs out. ECA Marcellus has 52 wells in the PUD stage, which means that the net proceeds flowing into the trust could increase or balance the declining wells when each of the new wells become operational.

Overall, the net income of the trust has decreased from $8.4 million in June 2013 quarter to $5.9 million in the March 2014 quarter. This reflects the trend in the company's declining performance considering the fact that net income has decreased 30 percent over the last three years ($41.8 million in 2011 to $29.5 million in 2013). The stock price has also followed the same trend declining from $20 levels in 2012 to below $10 in 2014.


ECA Marcellus Trust is currently trading at a price to earnings multiple of 4.5x its trailing twelve months earnings which was $1.56. The EPS expected in 2014 is around $1.35, which at current valuations gives a price target of only $6, which is 17.5 percent lower than the last traded price of $7.27 on July 08, 2014.


Unless news of fresh production in the PUD wells, in most of which drilling has been started by ECA, is announced, there is little possibility for upside in the stock. The only attractive feature would be the high dividend yields of 15 percent due to low price of the stock. However, few investors will find value in a trust with declining cash streams projected for the near future; at least for the next two to three years.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: ECT