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.
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.
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.