Since 2005, U.S. natural gas production has been on the rise thanks largely to the application of advanced drilling techniques that has helped unlock a bounty of gas trapped in deep shale formations. Domestic gas output set an all-time record in 2012 and then again in 2013, according to data from the U.S. Energy Information Administration, or EIA.
Now the agency is predicting another record year, as higher natural gas prices give companies incentive to ramp up activity in Pennsylvania's Marcellus shale, the nation's largest shale gas play and the single biggest driver of domestic production growth. That forecast bodes especially well for Marcellus-focused partnership Williams Partners LP (NYSE: WPZ) and its general partner Williams (NYSE:WMB).
Why gas production could set another record
According to the EIA's most recent Short-Term Energy Outlook, U.S. natural gas production will average 73 billion cubic feet a day, or bcf/d, this year and 74 bcf/d in 2015, up from a record 70.2 bcf/d average in 2013.
The agency's bullish forecast for domestic gas production is largely predicated upon the completion of new infrastructure projects in the Marcellus formation, the nation's largest and fastest-growing shale gas play, which will allow producers to ramp up their production.
Many of these projects have already come online over the past year, while a slew of other projects are slated for completion later this year. For instance, Transco's Northeast Supply Link, which came online in November of last year and is owned and operated by Williams Partners, added some 250 million cubic feet per day of firm capacity from the Marcellus to regional demand centers.
More infrastructure projects ahead
But the crucial thing to remember about this energy infrastructure buildout is that it is far from over. Oil and gas production is expected to continue growing at a rapid clip for at least the next several years. To accommodate this growth, midstream companies will need to continue investing in pipelines, storage terminals, and other key infrastructure.
According to estimates by consultancy ICF International, North American midstream firms will need to invest about $640 billion on midstream infrastructure over the next two decades, which comes out to a little less than $30 billion each year. Roughly half of that amount will need to be spent on natural gas midstream infrastructure, especially in the Marcellus.
This bodes especially well for Williams and Williams Partners LP (NYSE: WPZ), which already have leading positions in the Marcellus and are set to expand their footprint in the region significantly over the next few years.
Not only does Williams, the general partner, already own one of the largest pipelines in the Marcellus -- the Transco pipeline -- but it also recently agreed to buy a 50% general partner interest and 55.1 million limited partner units in Access Midstream Partners (NYSE: ACMP), a Marcellus-focused midstream natural gas services provider, for $6 billion in cash.
The acquisition should drive much stronger cash flow and dividend growth for Williams, with the company expecting to grow its dividend at an annual rate of 15% through 2017. The acquisition will also result in an even more stable business model for the company, boosting its fee-based revenues to more than 80% of its gross margin, since 100% of ACMP's contracts are long-term, fixed-fee contracts.
Further upside to dividend growth could exist if Williams' proposed merger of Williams Partners with ACMP goes through. If the proposed merger were to be consummated in 2014, the merged MLP is estimated to deliver distribution growth of 10%-12% through 2017. It would also have a decent distribution coverage of roughly 1.2 in 2015 and at or above 1.1 through 2017.