An Outlook for Marcellus Shale Midstream and Pipeline Companies

Higher demand from growing East Coast markets coupled with favorable economics even at currently low prices point to a continued boom in natural gas production from the Marcellus shale play according to a new report from Fitch Ratings. The firm cites a consensus estimate for production to rise from its current level of 4 billion cubic feet/day to more than 10 billion cubic feet/day over the next five years.

The ratings agency has looked at 10 pipeline and midstream companies with an eye to both transportation and processing facilities. These MLPs include Enterprise Products Partners LP (NYSE: EPD), EQT Corp. (NYSE: EQT), MarkWest Energy Partners L.P. (NYSE: MWE), National Fuel Gas Co. (NYSE: NFG), NiSource Inc. (NYSE: NI), Rockies Express Pipeline LLC (a joint venture of Kinder Morgan Energy Partners L.P. (NYSE: KMP), ConocoPhillips (NYSE: COP) and Sempra Energy (NYSE: SRE)), Spectra Energy Corp. (NYSE: SE), Sunoco Logistics Partners L.P. (NYSE: SXL), Tennessee Gas Pipeline Co. (owned by Kinder Morgan), and Williams Partners L.P. (NYSE: WPZ).

The main appeal of the Marcellus shale play is its proximity to the populated markets of the Northeast and Atlantic Coast regions. Fitch expects pipeline expansion and reversal projects, as well as additional processing plants to come online as production grows. Here’s a quick look at each company, along with an implied gain based on today’s share price.

Enterprise Products Partners (NYSE: EPD) has proposed building a 1,230-mile pipeline to transport ethane — a natural gas liquid (NGL) — from the southern Marcellus shale play to Texas. The pipeline will involve reversing the flow of a refined products pipeline and building about 450 miles of new pipeline at a cost of about $1.3 billion. Shippers have not yet fully committed to taking all the capacity on the 190,000 barrel/day ATEX pipeline, which is set to be in service by early 2014. Fitch gives Enterprise a first-mover advantage here and expects the pipeline to be fully committed once it is put into service. Enterprise shares are trading at $51.61 today, and the consensus target price is $56.23, for an implied gain of around 9%.

EQT Corp. (NYSE: EQT) has put a portion of its mid-stream assets into a new MLP, EQT Midstream Partners L.P. (NYSE: EQM) and the two companies are expanding rapidly in gathering operations. EQT’s ‘negative’ outlook reflects risk associated with the company’s expansion of its upstream operations, which vary with volatile commodity prices. EQT’s shares are trading at $53.70 today, and the consensus target price is $63.07, for an implied gain of around 17%.

MarkWest Energy Partners (NYSE: MWE) is the largest gatherer and processor in the the Marcellus play and the company continues to expand both its gathering and processing assets. Fitch rates MarkWest ‘positive’ on credit implications due to the focus on expanding fee-based revenues. MarkWest’s shares are trading at $51.02 today, and the consensus target price is $61.00, for an implied gain of around 20%.

Natural Fuel Gas (NYSE: NFG) is currently expanding two pipelines that have been fully subscribed and is working on projects to transport natural gas to Canada. As with EQT, Natural Fuel Gas is also expanding its upstream operations, exposing the company to added commodity risk. Natural Fuel Gas shares are trading at $46.45 today, and the consensus target price is $59.00, for an implied gain of around 27%.

NiSource (NYSE: NI), like Enterprise, is also reversing the flow of one pipeline to transport natural gas from the Marcellus shale play to the Gulf Coast. The reversed flow is scheduled to start in late 2014 with two shippers that have signed long-term transportation agreements. NiSource’s shares are trading at $24.44 today, and the consensus target price is $25.44, for an implied gain of around 4%.

The Rockies Express (REX) pipeline system was constructed to move natural gas from the gas fields of Wyoming and Colorado to a terminus in Ohio. The pipeline is due to re-contract with shippers in 2019, and Fitch is naturally wary of the company’s ability to do so at current rates. Kinder Morgan is also required to sell its 50% stake in the pipeline as part of its agreement with the Federal Trade Commission in the company’s acquisition of El Paso Corp. Fitch places a ‘negative’ credit implication on REX because of the costliness of reversing the flow of the pipeline. Kinder Morgan’s shares are trading at $82.70 today, and the consensus target price is $86.58, for an implied gain of around 5%.

Spectra Energy (NYSE: SE) recently completed a pipeline project in the Marcellus region and has five others on the drawing board. The company is seeking final approval to an expansion of its pipeline into New York City and is also considering additional pipelines to Canada. The company has a ‘stable’ outlook with ‘neutral’ to ‘positive’ credit implications from Fitch. Spectra’s shares are trading at $29.16 today, and the consensus target price is $32.82, for an implied gain of around 13%.

Sunoco Logistics (NYSE: SXL) and MarkWest are jointly developing an NGL pipeline to deliver ethane from the Marcellus region to processing plants in Pennsylvania and Ontario. Sunoco also owns pipelines that could be reversed to transport NGLs to East Coast ports for export. Sunoco’s shares are trading at $37.88 today, and the consensus target price is $39.72, for an implied gain of around 5%.

Kinder Morgan’s Tennessee Gas Pipeline has a very strong position in the Marcellus play and two current expansion projects due for completion in November 2013. The pipeline company is being held on ‘ratings watch positive’ by Fitch and the fully-subscribed pipeline system is given a ‘positive’ credit reading as well.

Williams Partners (NYSE: WPZ) has committed to capital spending of $11 billion on pipeline and midstream projects in the Marcellus shale by 2017. More than half will be directed at midstream infrastructure and the rest for expansion of the company’s Transco pipeline system. Fitch gives the company a ‘positive’ outlook with a ‘positive’ implication for credit.Williams’s shares are trading at $52.44 today, and the consensus target price is $63.23, for an implied gain of around 21%.

Paul Ausick