Natural Gas Infrastructure Plays

By Eric Fox | October 14, 2009 AAA

Infrastructure is critical for exploration and production companies that are developing the high growth shale plays in North America, and the industry is moving towards building or otherwise securing this infrastructure. Infrastructure refers to the physical assets needed to gather, process and move natural gas to a hub for sale to the customer. This includes compression equipment, gathering systems and pipelines.

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The Backbone Of The Industry
Some investors may see the infrastructure as a side issue for an exploration and production company, but in reality it is as important as the actual development of the assets themselves. Southwestern Energy (NYSE:SWN), which has spent years developing and boosting its production out of the Fayetteville Shale, recently saw its stellar production growth interrupted by pipeline issues in that area.

Due to inspection and maintenance of the Fayetteville Lateral of the Boardwalk Pipeline, Southwestern Energy reduced its guidance for 2009. The company said that its total curtailed volumes would approximate 15 Bcf of natural gas. Despite this set back, the company still expects to increase production by 45% over 2008.

The Players
Petrohawk Energy (NYSE:HK) has a midstream subsidiary with a $300 million capital budget in 2009. This unit is responsible for building the infrastructure needed to bring Petrohawk's production to market from the Haynesville Shale and other shale plays it is involved in.

Enbridge Inc. (NYSE:ENB) is planning on adding additional capacity in the Haynesville Shale. The company is building the LaCrosse Pipeline running from Panola County, Texas across Louisiana to connect with existing infrastructure in Washington Parish, Louisiana. The pipeline will be completed by 2012, and can carry as much as 1.8 billion cubic feet per day of natural gas. The company is even considering an extension of the LaCrosse Pipeline into Mississippi if the capacity is needed.

These assets can be quite valuable, and during the financial crisis when sources of credit dried up, many exploration and production companies monetized assets in this space to raise funds to either de-lever balance sheets or fund capital exploration programs.

Late in 2008, Quicksilver Resources Inc (NYSE:KWK) sold its midstream gathering and compression assets in the Barnett Shale, and used the funds to pay down some of its debt. Berry Petroleum (NYSE:BRY) sold its gas gathering system in May 2009, raising $18.5 million, which it allocated towards more drilling. EXCO Resources, Inc. (NYSE: XCO) took a similar action a few months later and sold 50% of its midstream assets in the East Texas and North Louisiana area.

The Bottom Line
The exploration and production industry is investing heavily in developing the emerging shale plays in North America using new technology to grow production. Along with this growth comes the necessity of securing midstream assets to gather and bring the natural gas to market for the consumer. (For more, see our Oil And Gas Industry Primer.)

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