Pennsylvania Leading the Shift to Natural Gas

by David Fessler, Investment U Senior Analyst
Thursday, November 17, 2011

Sometimes “luck is where you find it,” as the old saying goes. In my home state of Pennsylvania, it’s right under my feet.

We’re experiencing a natural gas boom here. Unemployment is below the national average, and dozens of companies have locked up the drilling rights on hundreds of thousands of acres.

Natural gas deposit here, to use a baseball term, is something akin to a “double header.” The first “game,” which is well underway, is the Marcellus Shale formation. It’s generally located about 4,000 to 5,000 feet below the surface.

The second “game” is the Utica Shale. It’s below the Marcellus, but is about four times the size, covering eight states and part of Canada. A few wells have been drilled in Ohio in the liquid part of the Utica.

Here in Pennsylvania, it’s all but untapped. It could contain four or five times the amount of gas that the Marcellus, which is estimated to contain nearly 500 trillion cubic feet of natural gas.

The Big Switch is Underway

One hundred years ago, Pennsylvania anthracite coal had the title of the best coal in the world. Its BTU output per ton is higher than any other coal ever found in the world. It still is, although there’s very little of it left.

But trains, homes and power plants all ran on the stuff. As recently as 2001, coal accounted for 57 percent of Pennsylvania’s power generation. Not any more. Now natural gas is the fuel of choice. Take a look at the graph below from the EIA.

pennsylvania energy generation chart

You can see that in the last decade, coal has shrunk to only 46 percent of Pennsylvania’s power generation. As power companies replace aging coal-fired plants with new, high-efficiency gas powered units, coal’s share of power generation here will continue to decrease.

Natural gas makes all the sense in the world. It’s far cleaner than coal or oil, and we’ve got more than a 100-year supply. Natural gas generation in Pennsylvania has steadily increased over the last decade, as seen in the chart below, also from the EIA.

pennsylvania natural gas chart

It’s a dramatic rise, increasing 10-fold in the last decade. Natural gas now accounts for 17 percent of Pennsylvania’s power generation, up from just two percent a decade ago. Almost all of it has been at the expense of coal. Most coal-fired power plants in Pennsylvania were constructed from the 1960s through the 1970s.

Nearly all of the natural gas-fired plants have been constructed since 2001. Much of the switch has to do with price. In the last two years, coal prices have shot up 54 percent, while natural gas prices have risen only eight percent in the same timeframe.

It’s pretty much a no-brainer for power companies. The cost of constructing a natural gas-fired power plant is also about 75 to 80 percent less than building a coal-fired one. Much less pollution control equipment is required, since natural gas is much cleaner burning.

Pipelines to Benefit

I’m a big fan of natural gas pipeline companies, and a number of them have significant operations in Pennsylvania. Many of them are structured as limited partnerships, and pay a healthy dividend. Atlas Pipeline Partners, L.P. (NYSE: APL) provides natural gas gathering, processing and treatment services.

It operates in the Permian Basin in Texas, and has a large gas gathering operation in Pennsylvania and West Virginia. As more and more wells are tied into its system, Atlas will gather and process more and more gas. Increased profits will flow right to unit holders. Right now, its dividend yield is 6.1 percent.

I also like MarkWest Energy Partners, L.P. (NYSE: MWE). It too is structured as a limited partnership, and operates in Pennsylvania and other major gas production areas. It currently yields 5.67 percent.

The stock recently touched a new 52-week high, but it has plenty of room to run. Look to accumulate either company on deep market pullbacks. Natural gas is clearly here to stay.

Pennsylvania’s in the middle of playing a natural gas double-header. It’s welcome news, especially to the thousands of people who are now gainfully employed by the hundreds of companies operating here to bring our valuable gas up to the surface and to the increasing number of power plant operators who want to use it.

Good investing,

David Fessler