Based on reports from Cabot Oil & Gas Corporation (NYSE:COG) and WPX Energy (NYSE:WPX), the infrastructure issues in the Marcellus Shale continue to hamper production. The issues provide ample opportunity for companies to grow pipeline assets. One such company is Williams Partners (NYSE:WPZ), which recently announced that it was signing binding commitments on a proposed natural gas pipeline in the Atlantic region.
The binding commitments are for 100% of the 1.7 million dekatherms of firm transportation capacity under its proposed Atlantic Sunrise expansion project. Demand is strong enough for 15-year shipment commitments from producers and power generators. The project is part of a larger plan to increase system capacity on its Transco pipeline system by 50%. The Atlantic Sunrise project will cost over $2 billion and won't go into service until the second half of 2017, if Williams Partners doesn't have problems with regulatory approvals.
The principal beneficiary of the Atlantic Sunrise project will be natural gas producers in the Marcellus that currently aren't even obtaining market rates for the energy source. The project plans to take surging new supplies of natural gas in the Marcellus producing region in northeastern Pennsylvania to the growing demand centers along the Atlantic Seaboard of New York, New Jersey, and Pennsylvania.
Cabot Oil & Gas recently reported that its surging natural gas production in northeast PA. had pricing differentials of $0.60 to $0.65. In addition, the company is holding off on a planned seventh drilling rig in the Marcellus, despite surging natural gas prices amid the colder-than-expected winter.
WPX Energy went so far as to write off natural gas assets in the Marcellus region due to uneconomical prices. While WPX hasn't seen the same level of drilling success in the area as Cabot Oil & Gas, it still wouldn't have written off over $1 billion worth of assets if not for the lower prices obtained in the area due to infrastructure issues.
The Atlantic Sunrise addition is part of a larger package of projects set up to increase capacity on the Transco, the nation's largest-volume interstate natural gas pipeline system with a network of 10,200 miles. In total, Williams Partners plans to spend $5 billion to upgrade the capacity by 50% with roughly $2 billion related to the Atlantic Sunrise portion. For the producers listed above, the major problem is that the pipeline won't be in service for over three years.
After strong growth in 2013, Williams Partners forecasts growth of 6% during 2014 and 2015. The below slide highlights the projects either recently finished or in the process of adding capacity to serve the Atlantic-Gulf area.
With Williams Partners paying a dividend of 7.3% with promised annual growth of over 6%, the partnership remains attractive at the current prices. The infrastructure strains in the Marcellus shale along with the ideal location of the Transco pipeline sets up Williams Partners for years of steady growth amid strong demand. With a market value of over $21 billion, investors shouldn't expect fast growth in the partnership, though the current yield and project list provide for years of steady growth.
Unfortunately for Cabot Oil & Gas and WPX Energy, this project won't relive strains in the northeast for over three years. Unless other pipeline projects help reduce the strains, it might take years for the price differentials to disappear. A dream come true for energy investors?
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock… and join Buffett in his quest for a veritable LANDSLIDE of profits!
A dream come true for energy investors?
Mark Holder and Stone Fox Capital clients own shares of WPX ENERGY INC. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.