These days, you can do a lot of investment research from home.
Nearly every financial document and economic report can be
But I still believe in the benefits of "boots on the
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 (
) 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
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
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 (
). 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
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 (
). 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 (
, which I already own in my
portfolio, is likely to have the most cost-efficient
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
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
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 advisory,
The Daily Paycheck
. 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.
[Note: EPD is not the only stock I am considering as the Utica
Shale comes online. I am also looking at two other picks that are
poised to capitalize as more oil starts getting pumped out of the
ground. One is a top oil producer that pays a 5.2% yield, while
another is a 5%-yielding MLP that could make good additions to
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