Using the Marcellus and Utica to Make Fat Yields Fatter

Natural gas producers in the Marcellus/Utica region are being forced to forgo larger profits as they reject ethane production due to lack of takeaway capacity, but don't worry -- MarkWest and Sunoco Logistics are on the job.

Apr 14, 2014 at 4:16PM

Bentek Energy forecast that U.S. natural gas production will explode upwards by 12.4 Bcf/d (versus 2013 levels) by 2018. How will America get there? On the back of the Marcellus and Utica shale plays. Expectations call for natural gas output from the Northeast to grow by 7.1 Bcf/d over that same time period. As output rises, so does the demand for storage facilities, fractionators, and pipelines, which opens up wonderful opportunities for midstream operators like MarkWest Energy Partners (NYSE:MWE)

Gas up for growth
47% of MarkWest Energy Partners' operating income this year will come from its investments in the Marcellus play. MarkWest's assets in the area include 615 MMcf/d of gas gathering capacity, 2.2 Bcf/d of gas processing capacity, 172,000 bbl/d of fractionation capacity, and 90,000 bbl of NGL storage capacity with access to an additional 900,000 bbl of propane storage. 

All in all, MarkWest Energy Partners' strategy seems to have paid off as natural gas output continues to rocket upwards in the Marcellus region. To keep up the momentum, MarkWest will keep building out its processing capacity in the area. This year MarkWest Energy Partners plans on adding roughly 900 million cubic feet a day of cryogenic natural gas processing capacity through five expansions of its existing processing plants. Beyond 2014, MarkWest has three additional expansions that will add 600 million cubic feet a day of processing capacity in the Marcellus region.

To further enhance its unit holders' return, MarkWest is investing heavily in the neighboring Utica play. MarkWest Energy Partners estimates that 14% of its 2014 operating income will come from the Utica shale. With plans to add 600 million cubic feet a day of dry gas processing capacity and 78,000 bbl/d of fractionation capacity, MarkWest Energy Partners will continue to see the Utica play become a larger part of its operations as the distributable cash flow from its Utica assets continues to grow. 

MarkWest Energy Partners is well-positioned to capitalize on the continued output growth from the Marcellus and the Utica shales, but more needs to be done. Natural gas liquids production is rapidly climbing higher, and this has put quite a strain on the existing oil and gas infrastructure. MarkWest is expanding its ability to process NGL in the Northeast, but that doesn't solve the ethane problem.

Due to the inability of E&P players to ship ethane to ports so that it can be exported to foreign markets, 200,000 bpd of ethane was rejected in 2013. 2014 could see that rise to 450,000 bpd, which is simply a waste. To generate more distributable cash flow while also alleviating a major problem for NGL producers, MarkWest has teamed up with Sunoco Logistics Partners (NYSE:SXL) to connect the Marcellus and the Utica to the rest of the world. 

Moving ethane to international markets
International petrochemical plants have sizable demand for ethane, but the problem is that there are few ways to transport the output from the Marcellus and the Utica to those markets. To try to fix this problem, MarkWest Energy Partners and Sunoco Logistics Partners teamed up to build the Mariner West pipeline. 

The Mariner West carries ethane from the Marcellus/Utica region up to Ontario so it can be sold to petrochemical producers in Canada. When oil and gas producers have to reject ethane, they are throwing away potential profits because they have no other choice. Given a choice, oil and gas producers would much rather sell their ethane output. This is why demand for pipelines that can transport ethane and other natural gas liquids to profitable markets will keep rising higher, in tandem with production growth.

Initially the Mariner West could only carry 20,000 bpd of ethane to Canada, but by the end of the first quarter of 2014 that should rise to its full capacity of 50,000 bpd. This is just the beginning, as Sunoco Logistics Partners has stated that the pipeline's capacity "can be scaled to support higher volumes as needed." As the Mariner West pipeline reaches full capacity and the companies expand it to meet future demand, MarkWest Energy Partners and Sunoco Logistics Partners will be able to rake in larger streams of distributable cash flow. 

To truly connect the Marcellus and Utica shale plays to the rest of the world, MarkWest and Sunoco Logistics are building the Mariner East pipeline as well. Initially the Mariner East will transport 70,000 bpd of ethane and propane to the Marcus Hook facility for processing and shipment to international markets. Due to the huge amount of pent-up demand for selling natural gas liquids to foreign markets, MarkWest and Sunoco are already talking about having another open season and further expanding the capacity of the Mariner East pipeline. Just as with the Mariner West pipeline, the Mariner East will offer years of cash flow growth as its capacity "scales upwards."

Foolish conclusion
For investors who look to play the natural gas revolution in America, MarkWest Energy Partners may serve as one of the best options. Because midstream operators like MarkWest Energy Partners get paid (mostly) based on volume and not on what Wall Street thinks hydrocarbons are worth, they don't face risks from fluctuating oil and gas prices (short of a major decline in prices, which could curb production levels). 

MarkWest Energy Partners pays out a 5.3% distribution that is slated to keep on growing, especially since MarkWest is guiding for its distributable cash flow to grow by 24% to 43% this year as more projects come online. Investors who want stability, a high yield, and growth should take a closer look at this master limited partnership. 

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Callum Turcan has no position in any stocks mentioned. 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.

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