Surging Natural Gas Production Will Fuel This Stock

With Marcellus production expected to grow at a rapid clip in coming years, Williams Partners stands out as a major winner in the making.

Apr 16, 2014 at 1:00PM

Production from Pennsylvania's Marcellus shale will by 2035 more than double from its current level of roughly 13 billion cubic feet per day, according to a new study conducted by consultancy ICF International on behalf of the Interstate Natural Gas Association of America.

To accommodate this surge in production, energy companies will need to spend nearly $70 billion on natural-gas infrastructure such as pipelines and gas gathering lines over the next two decades. One infrastructure company that should benefit tremendously from these expected developments is Williams Partners (NYSE:WPZ), arguably the best-positioned midstream specialist in the Marcellus. Let's take a closer look.


A major pipeline system in Alaska. Source: Wikimedia Commons.

Dominant position in the Marcellus
Williams Partners is a master limited partnership with ownership interest in three of the largest interstate natural gas pipelines in the country, which have a combined total annual throughput of roughly 3.26 trillion cubic feet of natural gas, or about 14% of U.S. natural-gas consumption.

Williams' biggest competitive strength in the Marcellus is its ownership of the 10,000-mile Transco natural gas pipeline system that runs from Texas to the New York City metropolitan area and serves customers in 13 states, including major metropolitan areas in Georgia, North Carolina, Washington, D.C., New York, New Jersey, and Pennsylvania.

Transco, Kinder Morgan's (NYSE:KMI) Tennessee Gas Pipeline 300 Line and the Millennium Gas Pipeline are the three main pipelines used by Marcellus producers to transport their output to key regional markets. Because of the Transco system's close physical proximity to the shale play, Williams has been able to secure long-term contracts to transport the output of several leading Marcellus producers to markets in the Northeast and along the Eastern Seaboard.

Major growth projects
Going forward, Williams Partners looks likely to maintain its dominant position in the Marcellus thanks to major expansion projects. Perhaps the most significant of these will be its proposed Atlantic Sunrise project, which will involve a series of major expansions of the Transco system. The $2.1 billion project is slated to go into service by the end of 2017 and will boost system-wide capacity by 50%.

Crucially, Williams has already secured commitments for the full 1.7 million dekatherms per day of capacity on Atlantic Sunrise through 15-year binding firm-transportation agreements, which provides a great deal of visibility into future cash flows. Marcellus driller Cabot Oil & Gas (NYSE:COG), for instance, has inked a 15-year gas sale and purchase agreement to supply 500,000 MMBtu per day of natural gas.

Another major Marcellus growth project for Williams Partners will be the proposed 124-mile Constitution Pipeline that would extend from Susquehanna County, Pa., to New York, and will be developed jointly by Williams Partners and Cabot, with an expected start up date in 2015. Like Atlantic Sunrise, Constitution's full 650,000 dekatherms per day, or dt/day, of capacity has already been fully contracted through long-term commitments with Cabot, which has agreed to transport 500,000 dt/day on the line, and Southwestern Energy (NYSE:SWN), which has committed to transport 150,000 dt/day.

Increasing fee-based revenues
Like most of Williams' projects, revenues from these pipelines are fee-based. This is crucial because it means customers will have to pay Williams for the volumes they have contracted irrespective of the amount of natural gas that is actually shipped. This essentially eliminates volumetric risk and provides Williams a great deal of security over the lines' long-term revenues.

As these pipelines go into service, they will further increase the percentage of Williams' revenues derived from fixed-fee assets, providing unitholders with increasingly stable revenue streams. Currently, more than 75% of Williams' cash flows are fee-based, while more than 40% are tied to long-haul, fee-based pipeline revenues.

Williams also has a relatively low weighted-average cost of capital of 7.5%, bolstered by solid credit metrics, a low leverage ratio of 3.75 times, and access to a $2.5 billion revolving credit facility that doesn't mature until July 2018. Furthermore, most of Williams' debt is fixed-rate and won't mature until 2018 and beyond, giving it plenty of time to generate cash before payment comes due.

The takeaway
With some $19 billion worth of high-impact growth projects that are either already planned or under negotiation, Williams Partners expects to deliver a respectable 6% compound annual growth in cash distributions per share through 2015. And given the partnership's steadily growing distributable cash flow, increasing fee-based revenues, and a healthy expected coverage ratio of 1.15 times this year, that distribution growth looks quite achievable.

For these reasons and more, Williams Partners may be one of the best midstream companies to play the continued growth in Marcellus production over the next decade. Thanks to major expansion projects such as Atlantic Sunrise, the company will further cement its dominance in the region, which should increase its share of fee-based revenues and allow for even stronger distribution growth after 2015.

3 stock picks to ride America's energy bonanza

Williams Partners' positive outlook is supported by the record natural gas production that's revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers