"No man can become rich without himself enriching others"
Andrew Carnegie

Tuesday, July 30, 2013

A Strong Dividend Grower For An Up-And-Coming Shale Play

Tower for drilling horizontally into the Marce...
Tower for drilling horizontally into the Marcellus Shale Formation for natural gas, from Pennsylvania Route 118 in eastern Moreland Township, Lycoming County, Pennsylvania, USA (Photo credit: Wikipedia)
By StreetAuthority

Chicago, Jul.30, stock market trading .- These days, you can do a lot of investment research from home. Nearly every financial document and economic report can be accessed online. But I still believe in the benefits of "boots on the ground."

If I'm investigating a retail stock, I visit store locations. If I'm researching an equipment manufacturer, I want to see its products operate and talk to its customers. And given my master limited partnership (MLP) holdings, a recent trip to one of the nation's top shale plays was long overdue.

In the late 19th century, Williamsport, Penn. was known as the "lumber capital of the world," and had more millionaires per capita than anywhere else in the country. The street where the lumber barons built their homes, on a hill overlooking the Susquehanna River, is still called "Millionaire's Row."

Lumber may have built Williamsport over a hundred years ago, but it is natural gas that is responsible for its riches in this century.

In 2010, Williamsport was the seventh-fastest growing metropolitan area in the United States. As I traveled around the city, I saw the signs of this growth. Hotels were booked. Old warehouses were being converted into riverfront loft apartments. Store parking lots were full.

Williamsport is located in the Marcellus Shale, a geological rock formation that spans parts of Ohio, Pennsylvania, New York and West Virginia. In 2005, the very first hydraulically fractured well started producing natural gas. Today, the Marcellus Shale produces 7 billion cubic feet of natural gas per day.

Current production from the Marcellus Shale will keep MLPs busy for years. But new production from the Marcellus is starting to slow. In June 2011, Pennsylvania had 111 drilling rigs working to uncover new wells. In June 2012, the number of rigs had dropped to 85. During my trip, only 58 rigs were working to develop new wells in the state.

I spoke with a young man who worked for oil and gas services company Halliburton (NYSE: HAL). He had spent the last year traveling throughout the Marcellus Shale. But he said he would likely spend the next year in Ohio. He told me Halliburton was having trouble keeping up with all the new demand in Ohio's Utica Shale.

He explained that there was still plenty of gas to be found in the Marcellus Shale. But all the big players were moving to the Utica Shale because the gas was "wetter" and therefore more valuable.

Dry gas is what it sounds like -- mostly just natural gas. It takes little to process it before it's ready for market. Wet gas is rich with natural gas liquids (NGLs) such as ethane, propane and butane. While wet gas has to be processed to separate the liquids, the liquids are valuable in today's market. On average, a typical dry gas well can generate $13,000 in revenue per day. The daily revenue of a wet gas well can top $35,000.

Who's Who in the Utica Shale
It is still a bit early to invest in the Utica Shale, but I wanted to share the names of two stocks I am keeping my eye on as this important resource develops.

You can't mention shale properties without mentioning Chesapeake Energy (NYSE: CHK). It was one of the first companies to recognize the opportunities in shale. But being a pioneer has turned into a mixed blessing. Chesapeake spent a fortune buying up drilling leases before the rest of the industry knew what hit it. But Chesapeake underestimated just how much the price of natural gas would fall with all the additional supply. It soon became painfully obvious that CHK overpaid for the leases it bought.

In June 2008, CHK traded above $60 per share and the price of natural gas was more than $10 per thousand cubic feet. CHK's stock is now $21.40 per share while the price of natural gas is just under $3.70 per thousand cubic feet.

In 2012, CHK sold more than $11 billion of its leases and pipelines in an effort to cut its losses. CHK has already sold another $3.6 billion of assets this year. Chesapeake could now be a turnaround story in the marking. But its 1.7% dividend yield won't tempt many income investors.

Thankfully, there are better yield opportunities involved in the Utica Shale.

A number of pipeline companies are building transportation systems to service the Utica Shale. But Enterprise Products Partners (NYSE: EPD), which I already own in my Daily Paycheck portfolio, is likely to have the most cost-efficient solution. EPD is building a 369-mile ethane pipeline from Ohio to Indiana. From there, EPD will use an existing underutilized 861-mile pipeline that runs from Indiana to the Texas Gulf Coast. It will need just another 55-mile pipeline extension in the Gulf Coast to give shippers access to EPD's natural gas liquids storage facility in Mont Belvieu, Texas.

Commercial operation of the pipeline is scheduled to begin in the first quarter in 2014. EPD has already received commitments from ethane producers to use the pipeline for at least the next 15 years.

On July 10, EPD raised its quarterly distribution to $0.68, up from $0.67 per unit. This was EPD's 36th consecutive quarterly distribution increase. At current prices, EPD has a yield of 4.3%.

Until Chesapeake's turnaround is further along, I'd be reluctant to recommend it to income investors. Enterprise Products Partners, however, has the kind of consistent track record I look for when selecting a security for my Daily Paycheck newsletter. EPD has been a solid performer in my portfolio since May 2011, returning 66%. While there will be a number of pipeline companies servicing the Utica Shale over time, I doubt any will do it as cost-effectively as EPD.
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