The rumors are true, America. We have officially entered the Golden Age of Gas. Horizontal drilling and hydraulic fracturing have unlocked the secrets of America's shales, and we now have more natural gas than we know what to do with.
U.S. natural gas production has increased from 1.45 trillion cubic feet per month in 1986 to 2.53 TCF per month in 2012. Nationwide, the booming U.S. shale plays are estimated to hold 482 Tcf of gas recoverable gas. Texas alone has 80.4 Tcf in natural gas reserves.
In fact, according to the Energy Information Administration, 2010's proved reserves of natural gas increased by the highest amounts ever recorded. The agency reported an addition of 33.8 Tcf of wet gas, which includes natural gas liquids.
Forget the producers
Despite all that gas, it's hard to think about buying into a natural gas producer when the price of natural gas, the very thing crucial to those companies making money, is so low right now. Instead, let's take a look at the companies that transport natural gas all across the country. They also gather it, store it, process it, separate out all the different natural gas liquids -- in short, they do everything but produce the stuff. They are the midstream industry.
The energy boom is producing so much gas, there simply isn't enough midstream infrastructure to handle it all. We need more pipelines, more fractionation facilities -- more everything, really. Natural gas production volumes are going up all across the country, and when volume goes up, midstream revenue goes up, too.
Right place, right time
Williams Partners (NYSE:WPZ) is the MLP for general partner Williams Cos (NYSE:WMB) and it's a pretty compelling midstream play right now. Sporting a 6.2% yield, a strong presence in the Marcellus Shale, and a crucial pipeline connection between Texas and New York, this MLP deserves to be on your radar.
Williams Partners' 15,000 miles of natural gas pipelines deliver 14% of the natural gas consumed in the U.S. Its Transco pipeline, which runs from the Gulf Coast up through the northeast to New York, is one of the most important lines in the country.
On top of that, 57% of WPZ's business mix is directly attributed to natural gas used for power generation -- an excellent source of growth, as more and more American utilities move from coal to natural gas-fired power plants. Williams Partners has already seen this dynamic in action in Florida, where 4 GW of potential new power generation have emerged within 50 miles of its Gulf Stream pipeline.
Yield of dreams
Oh, that 6.2% yield! Williams Partners plans to increase its distribution 8% this year, forecasting a 9% midpoint increase for 2013 and 2014. Successfully meeting those forecasts will mean WPZ's annualized distribution will grow from $3.14 in 2012 to at least $3.75 by 2014.
Risks to be aware of
Unlike midstream master Enterprise Products Partners (NYSE:EPD), Williams Partners has suffered from exposure to falling commodity prices. Twenty-five percent of Williams' cash flows are affected by the prices of the fossil fuels it handles, which made things tough in the second quarter of 2012. While fee-based pipeline cash flows will mitigate commodity price exposures, roughly 25% of the partnership's cash flows are exposed to the prices of natural gas, crude oil, and NGLs. However, Williams' midstream business dropped 40% to $192 million, thanks again to the collapse in NGL prices this quarter. Investors should keep an eye on this particular aspect of William's third-quarter earnings report when the company reports on October 30.
Looking ahead, however, a significant number of Williams' new projects are fee-based, which will mitigate the affect commodity pricing has on the partnership's profit, driving total fee-based business up to 80% as early as 2014, alone.
The Interstate Natural Gas Association of America, or INGAA, estimates that over the next 25 years, we will need a whopping $200 billion of midstream infrastructure development to handle growing gas supplies. The system needs to accommodate the additional capacity of 43 billion cubic feet of natural gas per day that is expected to come online by 2035. And that's just dry gas! When you factor in natural gas liquids and oil, you're looking at an additional $45 billion of infrastructure investment.
Many of these new projects will not be built without customer agreements in place, which means guaranteed, reliable income for midstream operators. And that's something every investor loves to hear.
Fool contributor Aimee Duffy holds no position in any company mentioned. Click here to see her holdings and a short bio. If you have the energy, check out what she's keeping an eye on by following her on Twitter, where she goes by @TMFDuffy.
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