Without This Region, 3 Energy Companies Would Be In Serious Trouble

Due to its huge amounts of natural gas, the Marcellus shale has huge potential for Chesapeake Energy, Regency Energy, and Kinder Morgan Energy Partners.

Apr 16, 2014 at 9:15AM

Oil and gas companies are devoting huge amounts of resources to a few premier areas of production in the United States. When it comes to natural gas, one of the most important regions is the Marcellus shale located in the eastern part of the country. Stretching across Pennsylvania and West Virginia, natural gas from the Marcellus shale is quickly enriching all sorts of companies fortunate enough to have staked their claim to the region.

A few of these gas companies pumping out lots of cash from the Marcellus shale include Chesapeake Energy (NYSE:CHK), Regency Energy Partners (NYSE:RGP), and Kinder Morgan Energy Partners (NYSE:KMP).

Minting money from Marcellus
The U.S. Energy Information Administration offered some striking findings about the Marcellus shale. Natural gas production has soared over the past five years, from well under 2,000 million cubic feet per day in 2009 to its current level of more than 14,000 million cubic feet per day.

In addition, the rig count in the Marcellus shale stands near 100. While that's below the highs of nearly 160 rigs in 2012, it's well above the 40 rigs in operation as recently as 2009. Not surprisingly, several energy companies are boosting their operations to take advantage of all that the Marcellus shale offers.

Chesapeake Energy's earnings before interest, taxes, depreciation, and amortization, or EBITDA, shot up 34% to more than $5 billion last year. Chesapeake's strong results were thanks to the Marcellus shale, where it has significant operations. In fact, its position in the Marcellus region is so impressive that it separately breaks out its Northern Marcellus and Southern Marcellus results to investors.

In the Northern region, Chesapeake grew fourth-quarter average production by 36% year over year. In the Southern portion, Chesapeake's average daily net production soared 82% year over year. It's clear how important the Marcellus position is to Chesapeake, and management believes its assets will "contribute substantial positive cash flow in 2014."

Two MLPs to play Marcellus
For investors, who enjoy receiving hefty yields from their investments, Master Limited Partnerships fit the bill. That's because MLPs such as Regency Energy Partners and Kinder Morgan Partners are required to distribute the bulk of their cash flow to investors. That's why Regency and Kinder Morgan yield 7% and 6.7%, respectively.

Earlier this year, Regency bought PVR Partners LP in a deal worth $5.6 billion, specifically to boost its footprint in the Appalachian Basin, which includes the Marcellus shale. The recently closed acquisition of PVR Partners' assets will come on-line and contribute to earnings and volume growth this year.

Management sees continued development of its Marcellus and Utica fields, where business conditions remain favorable. For Kinder Morgan's part, it's made huge natural gas acquisitions to boost its Marcellus presence.

First, the company purchased El Paso Pipeline Partners for $21 billion. At the time, Kinder Morgan CEO Richard Kinder called the deal a, "once in a lifetime opportunity". And, it's not hard to see why. Despite the rush into domestic natural-gas production, many promising shale fields lacked the necessary pipeline capacity to transport the gas.

This is where Kinder Morgan hopes to reap considerable rewards since El Paso's assets are, for the most part, interstate natural gas pipelines. To supplement its positioning in natural-gas transportation and storage, Kinder Morgan then purchased natural-gas pipeline operator Copano Energy for $3.2 billion earlier this year.

Exposure to the Marcellus region, thanks to the two acquisitions, was a major reason why Kinder Morgan's natural gas pipelines segment posted a 40% jump in earnings before depreciation and amortization in the fourth quarter. Its full-year results were even more impressive. That segment grew earnings by 70% last year, far exceeding management's goal of 54% growth.

Bank on the Marcellus shale
The EIA once stated that the Marcellus shale could hold the potential to account for 18% of gas production in the United States. Not surprisingly, a slew of companies are eagerly building out their production from the Marcellus shale. Chesapeake, Regency Energy, and Kinder Morgan Energy Partners are three large companies realizing strong growth from Marcellus gas.

Potential of the Marcellus shale is simply too tantalizing to ignore. For investors interested in playing natural gas, these three companies should be on your watch list. And, for investors who love to receive huge yields, Regency Energy and Kinder Morgan Energy Partners most-definitely fit the bill.

What other potential investments are capitalizing here?
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Bob Ciura owns shares of Kinder Morgan Energy Partners LP. 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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Jun 12, 2015 at 5:01PM

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