Recent pipeline expansions have helped the Marcellus shale play reach a production rate above 7 billion cubic feet (BCF)/day; surpassing the Haynesville shale to become the largest gas producing play in the US, according to a new IHS (NYSE: IHS) report. With this rise in production, the growth of the Marcellus has had a significant, positive impact on early movers such as Range Resources, who drilled the first horizontal well in the play in 2006, and Cabot Oil & Gas.
Both companies have dramatically improved their operational metric by investing heavily in the Marcellus over the last few years. Other companies, however, have yet to realize their full potential in the play, noted the IHS Herold Marcellus Shale Company Play Analysis.
“The Marcellus has been a game-changer for early entrants Range Resources and Cabot Oil and Gas. These companies have created significant shareholder value through low-cost, efficient growth that has been commensurate with the explosion of production coming from the Marcellus,” said Bryan McNamara, principal energy analyst at IHS and author of the IHS Herold Marcellus Shale Company Play Analysis. ”Both companies have been quick to capitalize on their significant amount of resources in the play as well results for both Range and Cabot have continually exceeded market expectations. Not all companies in this play have reached this level of performance though, and some are undervalued.”
With natural gas prices averaging $2.75/million cubic feet (MCF) during 2012, the number of gas-directed rigs running in the Marcellus fell by a nearly one third throughout the year to approximately 80 rigs. This resulted in a considerable drop in the number of wells drilled, which declined to 1,365 during 2012, 30 percent fewer than the high-water mark set the previous year.
Interestingly, the number of Marcellus permits issued in 2012 only fell 5% from 2011 numbers, which suggests a robust inventory of future locations remain. And despite a decrease in activity due to weak natural gas pricing, according to the IHS report, returns in the play remain relatively strong.
Despite the overall decline in activity, the Marcellus still has more gas-directed rigs running than any other US play. Activity has remained strong in the top five counties — Bradford, Lycoming, Susquehanna, Tioga and Washington. Except for Washington County, the other four counties are located in the dry gas window in the northeast section of the state.
Drilling in Washington County has been dominated by Range Resources as activity remains strong due to the liquids-rich gas stream. Approximately 30 percent of Range’s estimated ultimate recovery (EUR) of nearly 6 billion cubic feet equivalent (BCFe) is in the form of liquids, resulting in even stronger returns, as Range estimates as initial rate of return of 58 percent under a $3.00/MCF price scenario. The IHS CERA prices outlook calls for an average natural gas price of $3.72/MM British thermal units (btu) in 2013, including an average $3.98MMbtu during the latter half of the year.
Said McNamara, “In this case, we anticipate drilling activity picking up across all five counties, given the potential for higher returns. As for Range Resources and Cabot Oil and Gas, with both companies holding non-proven Marcellus resource potential nearly five times current proved reserves, we expect continued operational success and high production growth to remain value drivers.”
Cabot Oil & Gas, an active operator in Susquehanna County, has seen its proved undeveloped reserves for a Marcellus well go from 4.5 BCF in 2009 to 9 BCF in 2012, with a few producing wells booked in excess of 20 BCF. This success is attributable, in part, to increasing lateral length and more completion stages.
Based upon the appraised net worth conducted by IHS, EOG Resources, Southwestern Energy and Stone Energy are currently trading at a sharp discount to both Range and Cabot, and it appears their Marcellus positions are relatively undervalued. Given the current natural gas price environment, EOG is de-emphasizing its gas investments and allocating nearly all of its capital to its more oil-weighted assets such as the Eagle Ford and Bakken shale plays. As a result, EOG isn’t expected to aggressively develop its Marcellus assets in the near future.
However, Southwestern and Stone have limited liquids exposure and are dedicating more capital to the Marcellus in 2013. With an estimated 1,100 drilling locations economic under a $3 price scenario, Southwestern Energy’s aggressive 2013 drilling campaign could unlock significant additional value from its Marcellus acreage position.