Williams Is Betting on the Bluegrass Pipeline. You Should, Too.

by Aaron Levitt | June 27, 2013 12:12 pm

June has been a pretty awful month for midstream firm Williams (WMB[1]).

Earlier this month, there was a serious explosion and fire at the company’s Geismar propylene fractionator facility in Louisiana that killed two people and injured more than 100 workers. The plant remains shut down, and expansion work — to increase capacity by 600 million pounds-per-year — has been temporarily suspended.

Needless to say, investors weren’t so pleased with the turn of events and drove WMB shares down on the news.

However, investors who sold might come to regret their decision. Almost as if it were making amends for the financial issues caused by Geismar, Williams recently announced a killer set of pipeline expansions that will be huge for energy producers in the Marcellus and Utica shales.

Targeting Natural Gas Liquids

As we’ve highlighted time and time again[2], our nation’s energy bounty means nothing if we can’t transport around to end-users. Given that realty, midstream firms have been spending big to expand into the various shale formations now being tapped by hydraulic fracturing.

Two of the most underserved regions have been Pennsylvania’s mammoth Marcellus and Ohio’s Utica, but that’s about to change with Williams’ latest round of pipeline plans with joint venture partner Boardwalk Pipeline Partners, LP (BWP[3]).

Williams is planning on capitalizing on the liquids-rich window of these two shale fields by tying in a new pipeline system[4] with an older one. The proposed Bluegrass Pipeline will connect natural gas liquids production from the Marcellus and Utica to the various and expanding petrochemical facilities located on the U.S. Gulf Coast. The Bluegrass also will connect that underutilized NGL supply with the developing petrochemical market in the U.S. Northeast. Recently, Royal Dutch Shell (RDS.B[5]) unveiled ambitious plans to build a new $2 billion facility near Pittsburgh.

Williams’ own Geismar facility will be one of major beneficiaries of the pipeline expansion.

Both Williams and Boardwalk also will construct a new large-scale fractionation plant[6] as well as new natural gas liquids storage facilities in Louisiana. As if it couldn’t get any better, the joint venture is also exploring development of a new liquefied petroleum gas terminal and related facilities on the Gulf Coast to provide customers access to international markets like China.

Construction of the pipeline will consist of two phases — beginning with NGL gathering systems in Ohio, West Virginia and Pennsylvania. Eventually, capacity will expand up to 400,000 barrels per day to meet market demand.

Buy Some Williams

The key for the venture is that the new Bluegrass Pipeline construction will tie into Boardwalk’s Texas Gas Transmission system. By combining the new pipeline with an existing one, the partners estimate that the new Bluegrass should be moving NGLs sooner than other options. The Bluegrass is expected to be fully operational and at max capacity by 2015.

That first-mover status could be huge as production in the Marcellus and Utica continues to surge. With natural gas prices remaining relatively low, many producers such as Range Resources (RRC[7]) have moved into more profitable NGL production. NGL prices generally track movements in the market value of crude oil, which is currently around $95 per barrel. Analysts estimate that total natural gas liquids production in the Northeast is expected to exceed 1.2 million barrels per day by 2020.

At the same time, chemical manufacturers have been able to take advantage of the glut of NGLs — like ethane and propane[8] — to realize some of the largest margins in the industry’s history. Ethane is a vital feedstock for the sector and is sent through a refining process to produce one of the most basic of commodity chemicals, ethylene.

Basically, the chemical producers can’t get their hands on enough of the stuff.

Right now, there’s hardly any NGL midstream capacity in the region, and many of the projects on the docket won’t be completed until late 2015 or 2016. That will give WMB and BWP plenty of extra revenues as the pair will have such a huge head start on piping NGLs to these chemical facilities.

While the joint venture hasn’t officially outlined the final plans for the Bluegrass — such as costs and an actual start date for construction — the pipeline’s potential does make Williams an interesting watch-list or buy candidate considering its current misfortunes at the Geismar plant.

Those misfortunes might have been overstated by the market anyway, as Williams announced that its $500 million in property damage insurance and $610 million in liability insurance should cover all legal and repair issues[9] at the site.

The company should report updated guidance on the state of the Geismar plant in the next few days. Any bad news that could send the stock lower could make a good buying opportunity to play all the good news that the Bluegrass pipeline will eventually bring. In the meantime, WMB’s healthy 4.4% dividend is a nice reward for waiting around.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities. 

  1. WMB: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMB
  2. time and time again: https://investorplace.com/2013/06/make-a-move-on-construction-firm-mastec/
  3. BWP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BWP
  4. new pipeline system: http://co.williams.com/feature/speed-to-market-connecting-utica-marcellus-ngls-to-petchem-export/
  5. RDS.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.B
  6. fractionation plant: https://investorplace.com/2013/05/3-ways-to-cash-in-on-the-chemical-industrys-building-binge/
  7. RRC: http://studio-5.financialcontent.com/investplace/quote?Symbol=RRC
  8. propane: https://investorplace.com/2013/05/power-your-portfolio-with-2-propane-plays/
  9. should cover all legal and repair issues: http://www.bloomberg.com/news/2013-06-26/williams-rises-as-insurance-covers-blast-damages-dallas-mover.html?cmpid=yhoo

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