Pennsylvania is where the modern energy industry started and Pennsylvania is where America’s search for fossil fuels might end, in the sense that the Marcellus shale basin beneath parts of the state may still be pumping gas long after the last domestic oil well has run dry.

The reservoir is thought to contain 330 trillion cubic feet or more of natural gas, enough to sustain this year’s production pace for a century. Of course, output is still rising: the energy analysts at Bentek estimate it’s up 50 percent this year in Pennsylvania and West Virginia, and bullish 2014 forecasts from key producers suggest no letup.

Production is booming because Marcellus wells provide some of the richest returns in the industry, comparing favorably with the oil gushers almost anywhere else in the US. But the output will keep rising only so long as midstream operators can provide the necessary infrastructure, including gathering pipelines, compression facilities and processing plants. Demand for such infrastructure has been huge, and the few major regional suppliers of such midstream services have benefited tremendously.

Marcellus is also partly responsible, along with other booming US shale plays, for increasing the supply and depressing the prices of natural gas liquids (NGLs). But NGL prices have already recovered somewhat from the recent lows, and are likely to make more headway in the years ahead as new petrochemical plants are built to take advantage of this cheap feedstock and exports requiring extensive preparations start to ramp.

This month we’re adding to the portfolios two businesses riding the tailwind of all these trends and benefiting from a major presence in the Marcellus, Utica and elsewhere in the east. MarkWest Energy Partners (NYSE: MWE) and Williams Companies (NYSE: WMB) are perhaps the only two indispensable players in the development of a new regional energy complex. As such, they will have organic growth options that few competitors can match. And recent results suggest they’re capable of seizing the opportunity.

MarkWest is a Denver-headquartered but Northeast-focused master limited partnership that’s become the region’s leading gas processor. It will have plants capable of processing a total of 3.7 billion cubic feet per day (bcf/d) of natural gas operating in Pennsylvania, West Virginia and Ohio by the end of 2014, doubling its current capacity.

Its longer-term record is equally impressive. Between 2004 and 2012, distributable cash flow grew at a 35 percent compounded annual rate with help from accretive acquisitions. Between January 2009 and August 2013, limited partner units have delivered a stunning total return of 1,124 percent, versus 237 percent for the Alerian MLP Index and 100 percent for the S&P 500.

Distributions have risen at a 12 percent annual compounded rate since the 2002 IPO, but the annual rate of change slowed to 5 percent in the second quarter as the partnership ramped up Marcellus and Utica investment. Those investments should pay off handsomely in the years ahead.

MarkWest has powerful allies in its quest for regional dominance. The Houston-based private-equity firm EMG Group, a well-connected backer of energy projects, supplied some of the capital MarkWest needed to develop its infrastructure in the Marcellus and is now playing the same role in the Utica. Menawhile, top US pipeline operator Kinder Morgan has signed a letter of intent for a joint venture with MarkWest to ship Utica’s NGL bounty to the Gulf Coast via its retrofitted pipelines, and to process the gas in Ohio and NGLs at the new pipeline’s southern terminus.

Source: MarkWest presentation

MarkWest’s regional scale has made in an attractive partner as well to some of the area’s fastest growing drillers, and the long-term contracts they are signing is diminishing MarkWest’s exposure to commodity prices. Seventy percent of next year’s revenue is forecast to be derived from fixed fees, up from 50 percent in 2012.

In addition to its eastern assets, MarkWest has gathering and processing operations in mid-Continent giving it access to the Granite Wash as well as the Haynesville, Woodford and Eagle Ford shales. This segment is less lucrative and dynamic than the Marcellus, but still supplies some 40 percent of operating income.

Equity investors face periodic dilution as a result of compensation promised to EMG as well as the need to finance growth projects with equity offerings. But they don’t need to sweat incentive drawing rights, because MarkWest does not have a general partner that’s owed any.

The latest quarterly distribution of 84 cents per unit implies an annualized yield of 4.8 percent. The distribution coverage ratio for the first half of the year was 1.05. Debt is manageable and liquidity ample after a well-timed $1 billion 10-year note offering in January at a 4.5 percent interest rate.

Down the road, it’s easy to see one of the larger Texas-based MLPs taking over MarkWest for the Northeast entrée it offers. We’re adding MWE to our Conservative Portfolio. Buy below $77.

Unlike its northeast archrival MarkWest, Williams is not a master limited partnership itself. It does benefit from incentive distribution rights both for its sponsored MLP, Williams Partners (NYSE: WPZ), and from its 50-percent stake in the general partner for Access Midstream Partners (NYSE: ACMP), which bought out Chesapeake Midstream’s assets in the Utica.

Between its gathering pacts with Chesapeake in the Utica and Cabot Oil & Gas (NYSE: COG) in the Marcellus, Williams has hitched its wagon to a key driller in each basin. It’s also developing its own Utica gathering and processing infrastructure, while bankrolling Dominion’s (NYSE: D) efforts to do the same.

Source: Williams corporate site

Yet Williams derives the bulk of its revenue elsewhere. The principal sources were:

• Gathering, processing and treating operations in New Mexico, Colorado and Wyoming and the Northwest interstate pipeline linking them to markets in the Pacific Northwest;


• Offshore gathering in the Gulf of Mexico along with related processing facilities and pipelines, including the interstate Transco linking the Texas and Louisiana coasts to the Northeast, as well as part ownership of the Gulfstream pipeline linking the Alabama coast to Florida; and


• NGL and Petchem Services, including and NGL fractionator and storage facilities near the hub in Conway, Kansas, along with a 50 percent stake in a related pipeline, a refinery grade propylene splitter and related pipelines on the Gulf Coast and an olefins plant in Geismar, Louisiana being repaired after an explosion this summer killed 2 and injured more than 100.

Revenue in the most recent quarter was down 5 percent year over year, primarily because of a big decline in NGL processing margins. But costs declined as well, and those margins should rebound in the years ahead as exports ramp up and additional petrochemical capacity comes on line.

Williams is certainly trying to speed up this trend, and its aggressive investments are forecast to boost the common dividend by 20 percent this year, as well as in 2014 and 2015. The current yield is 4.2 percent. Because Williams is not an MLP it pays corporate income tax, but the dividends are taxed at the preferential 15 percent rate for most investors and the shares are suitable for a retirement account.

They’ve also been deemed suitable of late by some prominent hedge funds. Daniel Loeb’s Third Point, which has invested in Williams in the past, reported a new 1.75 million share position at the end of the second quarter worth more than $61 million at the current share price. Corvex Management, run by a former Icahn Enterprises senior executive , raised its stake to more than 12 million shares with a current value of $426 million, or more than 7 percent of its portfolio, during the second quarter. Soroban Capital Partners, founded by a hedge fund veteran who has previously served as an energy analyst at Goldman Sachs, spent the second quarter building up what it reported as by far its largest long position. Soroban owned Williams shares and calls accounting for nearly 16 percent of its $3.3 billion portfolio at the end of the second quarter.

That looks especially brave considering that the stock has crashed twice in a little more than a decade,  dropping from the vicinity of the recent highs to less than $2 in 2002 and less than $10 in 2009. So does management’s decision to keep raising the distribution at WPZ despite a forecast of inadequate cash flow to cover those payouts through the end of next year.

Still, this isn’t 2002 or 2009: the gas commodity cycle is now working in Williams’ favor, and shale drilling has unlocked previously unavailable processing and fractionating opportunities. And Williams is deploying its profits from the West and the Gulf to build the only operation in the Northeast rivaling MarkWest’s. Its interstate pipelines are underappreciated strategic assets.

We’re adding WMB to the Growth Portfolio. Buy below $39.