3 Natural Gas Game Changers Scoring Big Profits

The US gas boom is proving to be one of the largest in history. Since 2009, US gas production has increased 21%, and the Energy Information Administration expects even this record amount to increase by 56% by 2040.

US Natural Gas Marketed Production Chart
US Natural Gas Marketed Production data by YCharts

A vital component of America's gas boom is the Marcellus and Utica shales, which are estimated to contain as much as 480 trillion cubic feet of gas and are projected to increase production 34-fold from 2007-2035. 

With gas production costs in these formations are as low as $1.11/ thousand cubic feet compared to current gas prices of $4.39, it's no wonder companies like Southwestern Energy (NYSE: SWN  ) , EQT Corporation (NYSE: EQT  ) , and its MLP EQT Midstream Partners (NYSE: EQM  ) are betting big and getting rich from these formations. As this article will make clear, there is no reason long-term investors can't join in on the bonanza.

Gas boom fueling booming earnings

Company Yield 10 Year Projected Distribution/Dividend Growth Rate 10 Year Projected Earnings Growth Rate 10 Year Annual Expected Total Return
EQT Midstream Partners 2% 19.55% 17.60% 21.55%
EQT Corporation 0.10% 17.85% 26.50% 35%
Southwestern Energy 0 na 14.46% 14.47%
S&P 500       9.20%

Sources: S&P Capital IQ, Yahoo! Finance, Moneychimp.com

Southwestern Energy is the fourth largest US gas producer with 7 trillion cubic feet equivalent of reserves -- 10.6 years' worth of production at current levels. From 2003 through 2013 the compound growth rates of Southwestern's reserves and production were 32% and 30% respectively. Lest investors worry that Southwestern Energy will run out of gas anytime soon, its reserve replacement ratio during this time was 370%.

In fact in 2013 alone Southwestern Energy reported 74% reserve growth, and its reserve replacement ratio was 550%. 

In the first quarter Southwestern Energy reported continued strength with 23% production growth with Marcellus production up 147%. Adjusted net income soared 58% and the company reported 8% operating income growth in its midstream segment, which consists of 2,000 miles of pipelines with a daily capacity of 2.74 bcf/d in the Fayetteville and Marcellus shale formations. However, as impressive as Southwestern Energy's 292,000 net acres of Marcellus shale have been, Southwestern is diversifying into other areas as well.

Southwestern Energy's bread and butter lies in its 1.35 million net acres of Marcellus, Fayetteville, Arkansas, Louisiana and Texas land. However, the company is working on or has acquired 4.269 million net acres in areas such as Colorado and New Brunswick, Canada.

If Southwestern Energy's management can execute on its production growth plans as well as its been able to do in its Marcellus acreage, then long-term investors in Southwestern should be richly rewarded. 

EQT Corporation is the general partner and 36.4% owner of EQT Midstream. However, it is also the 15th largest gas producer in America. 

A major investment thesis for EQT is in its enormous growth potential. With 44 trillion cubic feet of gas reserves, EQT has 120 years' worth of current production, which is up 24% this year alone.

Its 560,000 Marcellus net acres hold 3,020 potential drilling locations, of which only 390 have yet been tapped. With Marcellus production up 70% in 2014 and a 674% well count growth runway, EQT's Marcellus potential is truly massive. Two additional growth avenues for EQT are EQT Midstream, its pipeline MLP, and its foray into the Permian Basin's rich oil fields.  

EQT Midstream Partners is small but has a lot of growth potential. It consists of 60% of EQT's midstream assets. With 1,000 miles of Marcellus pipeline with a capacity of 2.7 bcf/d, EQT Midstream's newest endeavor is sure to spur strong growth. 

EQT Midstream is partnering with NextEra Energy to construct the Mountain Valley pipeline. This 330 mile, 2 bcf/d project will connect the Marcellus shale to Virginia with potential extensions as south as North Carolina. Not only is this project already 50% committed (under 20-year contracts) but it will represent 74% growth in EQT Midstream's midstream capacity. 

The combination of this as well as the potential for additional drop downs from EQT corporation means that EQT Midstream's distribution is set for stunning long-term growth, which in turn will fuel immense growth in incentive distribution right fees for EQT corporation.

EQT Corp has one other major growth area it's working on: the Permian Basin, an area that at 75 billion barrels of recoverable oil (estimate up 50% in the last year) represents the largest oil reserve on earth. The Permian is larger than even Saudi Arabia's legendary Ghawar oil field which has been producing oil for 63 years and holds an estimated 71 billion remaining barrels.

EQT Corp has 72,000 net acres in the Permian basin, with an estimated 500 million barrels of oil equivalent reserves currently producing 4,800 barrels/day of 75% high-margin liquids and 25% gas. With 1,500 to 1,700 potential horizontal drilling locations, EQT has a long growth runway ahead of it in the Permian. In 2014, EQT Corp plans on drilling two new wells at a cost of $7.5 million each and ramping up to 20 to 30 new wells in 2015. This means that by the end of 2015 98% of EQT Corp's Permian potential will remain untapped.

Foolish takeaway
The Marcellus and Utica shale plays represent the greatest gas growth story in North American history, and long-term investors can cash in on the prosperity by investing in Southwestern Energy, EQT Corp, and EQT Midstream Partners. Each company has a long growth runway and additional growth catalysts that are sure to keep earnings, dividend, and distribution growth strong. This in turn is likely to generate market-beating total returns for decades to come. 

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