There's a new natural gas hub in the house – and it's cheaper than ever. The natural gas game is changing once again, and several companies stand to pull major profit from this price pendulum. Here's what you need to know.
Natural Gas' New Home
The Louisiana-based Henry Hub price has always served as analysts' natural gas price benchmark. But all that could soon change, according to the Energy Information Administration, or EIA. Due primarily to booming production in the Marcellus region, natural gas from the Northeast is expected to drop below Henry Hub's price in early 2014 , as estimated by forward market prices.
Northeast natural gas production has been on the rise since 2011, and has grown a seasonally adjusted 30% so far for 2013 alone . Although the rise is region wide, the EIA tips its hat specifically to Dominion's (NYSE: D ) $1.5 billion Natrium plant , as well as Magnum Hunter Resources' (NYSE: MHR ) natural gas provisions to Markwest Energy's (NYSE: MWE ) Mobley plant .
Dominion's plant is a joint venture with Caiman Energy II, LLC, and is expected to process 400 million cubic feet of natural gas per day (MMcf/d) and fractionate 59,000 barrels of natural gas liquids per day (Bbl/d) once it's up and running at full capacity . The plant opened for business four months ago , and is only one piece of Dominion's larger plan to become a natural gas giant, both in the U.S. and abroad .
But Dominion's playing catchup to Markwest's Marcellus operations. Touted as "the largest processor of natural gas in Marcellus ," In this region alone, the company enjoys a 615 MMcf/d gathering capacity, 1.6 Bcf/d processing capacity, and 98,000 Bbl/d for NGLs. The company can also take advantage of its 90,000 Bbls of natural gas liquids (NGL) storage capacity to pile up on Magnum Hunter Resources' provisions when the getting's good, and rely on its own reserves when it's not . So far for 2013, the company has added a 120 MMcf/d expansion to its Mobley plant, and expects a third facility to up capacity by another 200 MMcf/d by Q4 2013 .
Coal production in Appalachia has been on the decline over the last forty years, and the EIA isn't expecting an uptick anytime soon.
With cheaper natural gas closer than ever, coal companies with Appalachian assets could be headed for trouble. James River Coal (NASDAQ: JRCC ) , Alpha Natural Resources (NYSE: ANR ) , and Alliance Resource Partners (NASDAQ: ARLP ) are all making exits from Appalachia. Alliance announced last month that it would close down one of its few remaining mines in the region, while Alpha is waiting out the price war a while longer by idling its Laurel Mountain mine in Virginia .
James River's three mine idles will take the largest, approximately 24%, chunk out of production, while Alpha's Appalachian operations represent 17% of overall production. Alliance makes it out on top – its recent closure only accounts for 1.7% of its total 2012 output .
Will Natural Gas Win?
With increasing scale, powerful production, and new export opportunities on the East Coast, Henry Hub's honey days may be over. Natural gas is making major moves around Marcellus, and local coal will be crushed even more than national natural gas. The energy sector is changing fast – and wise investors should be sure to keep up.
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