Marcellus Shale natural gas production is primed for a surge in growth that presents both opportunities and challenges for U.S. midstream and pipeline companies as well as investors.

Despite low current natural gas prices and environmental concerns over hydraulic fracturing, the relatively robust economics of the Marcellus and increasing regional demand mean that production should continue to grow dramatically. In the process, substantial new energy infrastructure will be required to gather, process, and ship natural gas and associated natural gas liquids (NGLs).

It is anticipated that project sponsors will benefit from the growth in the Marcellus as new infrastructure is put in place to move production to end user markets. Contracts for midstream and pipeline services to date have generally been credit positive (long-term fee-based arrangements with minimal commodity price exposure). Financing decisions made by sponsors to fund projects have also been balanced between debt and equity.

However, expansion in the Marcellus may have less favorable impacts on select credit profiles as well. Because Marcellus production competes with supplies from the Gulf, the Rockies, and other producing basins, capacity utilization on certain supply-driven pipelines will be diminished which in turn may increase re-contracting risk for those systems.

Select companies have also changed their business mix, ramping up their exposure to higher volatility exploration & production (E&P) activity in the region versus lower volatility regulated businesses. Counterparty risks can also be an issue although the relatively low breakeven prices associated with Marcellus production reduces the likelihood that production would stop even under scenarios of producer distress.