When it comes to natural gas, there has been a significant spread between pricing in the hubs in Marcellus area and Henry Hub price in Louisiana over the last years. However, the new takeaway pipeline capacity that is coming online this winter in the Northeast will definitely make the spread narrow in the second half of 2018 and the coming years. These new takeaway nat gas pipeline projects are illustrated below:
Specifically, between now and the end of the withdrawal season, an additional 4.5 Bcf/d of takeaway capacity will be in service, transporting natural gas from the Northeastern Appalachian production region to Midwest and Southeast markets and allowing pipelines to more easily meet demand needs.
Energy Transfer's (ETP) Rover pipeline (3.25 Bcf/d) is one of the largest projects and will move natural gas from Appalachia to the Midwest, as illustrated below:
The Rover pipeline will be completed in three phases. The first phase (0.7 Bcf/d) was granted in-service authorization in August 2017. The second phase (1.4 Bcf/d) will be in service by year end. The third phase (1.15 Bcf/d) is estimated to be in service in March 2018. According to S&P Global Platts, 2.95 Bcf/d of the project is subscribed by binding commitments.
The second large pipeline project is TransCanada's (TRP) Leach XPress (1.5 Bcf/d), as illustrated below:
This project will bring natural gas from the Appalachian basin to the Southeast. Although it was expected to be complete this Fall, there were many delays and it's now expected to be in service in January 2018.
Lastly, there is also Williams' (WMB) Atlantic Sunrise that will transport up to 1.7 Bcf/d from the Marcellus shale in Pennsylvania to markets in the U.S. Mid Atlantic and Southeast. Atlantic Sunrise Natural Gas Pipeline project involves the expansion of the existing Transco pipeline, which transports approximately 10% of the natural gas in the U.S., to Susquehanna County and enable the transportation of an additional 1.7 bcf/d of natural gas, serving approximately seven million homes .
Given that the U.S. Court of Appeals for the District of Columbia dissolved the Nov. 6 stay last month, the pipeline is expected to be in service by mid-2018, as illustrated below:
As such, I don't foresee a repeat of 2013-2014 with natural gas prices spiking over US$4.50/mmbtu even if polar vortex hits the US more than once this winter.
Moreover, our model shows that natural gas storage inventories will be between 1,200 BCF and 1,700 BCF at the end of the withdrawal season in March 2018 and Henry Hub price will be rangebound between US$2.70/mmbtu and US$3.40/mmbtu for the most part of 2018. This remains a preliminary projection and will be revised over the next weeks as finalized temperature and pipeline data is integrated into my model.
Lastly, the aforementioned developments have positive implications for these companies:
1) The chief beneficiaries (main shippers) for the increased capacity are producers that have staked out prime positions in that region and are dominating the Marcellus and Utica plays, although some have backed down on drilling in light of the spread between Henry Hub and Marcellus natural gas price. There producers are totally or primarily focused on this region such as Range Resources (RRC), EQT Corporation (EQT), Cabot Oil & Gas (COG), Southwestern Energy (SWN), Antero Resources (AR) and Epsilon Energy (EPS.T, EPSEF).
2) Additional beneficiaries are companies with a big presence in the Appalachian region such as Chevron (CVX), CONSOL Energy (CNX), ExxonMobil (XOM) through XTO Energy, Chesapeake (CHK), Anadarko (APC) Gulfport Energy (GPOR), Enerplus (ERF) and privately-held HG Energy LLC based in Parkersburg, W.V., that acquired Noble Energy's (NBL) upstream Marcellus assets in northern West Virginia and southern Pennsylvania for $1.225 billion last May. NBL had to sell these assets to reduce its debt resulting from the Clayton Williams Energy (CWEI) transaction, which materially expanded the company’s core Delaware Basin position.
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