A Texas Natural-Gas Driller Looks To Strike It Rich In Appalachia
biz.yahoo.com
The Barnett Shale in Texas might be the busiest natural gas field in the country, but the new buzz is all about the Marcellus Shale in Appalachia.
With recoverable reserves estimated at up to 50 trillion cubic feet -- about double Barnett's -- it could make the Barnett Shale look like a pint-sized Texan.
The thing is, Marcellus has yet to produce much natural gas. The hard shale rock buried deep under western Pennsylvania and three bordering states is still in the early stages of development.
Leading the way there is Range Resources (NYSE:RRC - News). The natural gas company was the first to stake out lots of land in the Marcellus Shale. It started in 2004.
It now has the largest position by far of any of the other players that have followed, which include Cabot Oil & Gas (NYSE:COG - News), Southwestern Energy (NYSE:SWN - News) and Chesapeake Energy (NYSE:CHK - News), among others.
Range estimates that of its 1.1 million-acre lease holdings there, some 650,000 acres are productive, equal to 10 trillion to 15 trillion cubic feet in natural gas reserves.
"Marcellus is the future," said Jack Aydin, oil and gas analyst with KeyBanc Capital. "They're probably ahead of everybody by at least two or three years."
Gas held deep underground in hard shale rock was impenetrable until new technology was developed in the past decade to get it out of the ground.
Using sophisticated gear, Range has so far drilled 88 wells in the Marcellus, both vertical and horizontal. Vertical wells were drilled to learn about the shale formation.
Horizontal wells are about four times as costly as vertical wells -- as much as $4 million each -- but are likely to be more productive than vertical wells. They come in contact with a larger "pay zone" of the shale than vertical wells.
In the Marcellus, horizontal drills go down about 6,000 feet like vertical wells but then take a sharp left or right turn and continue on about 3,000 feet.
This year, Range is focused on taking Marcellus to the next level, with plans to drill 60 new wells and build more pipeline infrastructure.
Of the 60 wells that Range plans to drill in the Marcellus this year, 40 will be horizontal.
While in an "earn as we learn" mode, Range is starting to see gas trickle out of the Marcellus. The last eight horizontal wells it drilled produce 3.2 million to 4.7 million cubic feet of gas a day.
"Marcellus is a very large portion of their valuation," said analyst David Kistler of Simmons Co. "However, as a company, it is relatively well diversified."
Based in Fort Worth, Texas, Range is no stranger to the Barnett Shale, which encompasses about 5,000 square miles in and around Fort Worth. Not surprisingly, the company has been active in the Barnett as well as other parts of Texas, Oklahoma and New Mexico.
Range holds more than 100,000 net acres in the Barnett Shale, with production running about 98 million cubic feet equivalent a day, up from 35 million a year ago. It plans to add 100 new wells there this year.
Range also is active in other areas in the Appalachian region, where it has roots that go back to the early 1970s.
The most productive is in the Nora coal bed methane field in southwestern Virginia. Here, methane gas is produced from coal rock.
Range has a 50-50 joint venture with Equitable Resources (NYSE:EQT - News) in Nora, one of the largest coal bed methane fields in the region.
"The two of us own essentially the whole play, which is 300,000 acres," said Range CEO John Pinkerton. He says they've drilled about 1,800 wells so far.
Range, Pinkerton says, will get more than half of this year's total production from Barnett, Nora and Marcellus, in that order.
"If it develops out, Marcellus should (one day) be the largest because we have such a big acreage position," Pinkerton said. What's more, it owns almost 100% of the leases there and pays relatively low royalty rates to landowners -- 12.5%. Royalties in the Barnett now run around 25% for good spots.
Range has proved it can deliver for the past 20 consecutive quarters, each of which has outproduced the preceding quarter.
In the fourth quarter, average daily production volume rose 17% to 343 million cubic feet equivalent. Total revenue of $862 million was up 16% from the earlier year, aided by an 18% rise in realized commodity prices. Earnings rose 51% from the prior year to $1.69 a share.
At year-end, Range boasted a drilling inventory of 11,000 wells. It plans to drill nearly 1,000 wells in 2008, eyeing 15% production growth.
Pinkerton readily admitted that the oil and gas business "can be pretty unpredictable." Still, he says natural gas prices should average between $7 and $9 for the next three to five years and more than $10 past that time.
"People have finally figured out that energy is a commodity, and as you use it up there is less around," he said. "And of all the hydrocarbon fuels, natural gas is clearly the most carbon-footprint friendly. Natural gas will be the clear winner. It's homegrown and it's cleaner (than oil and coal)."
Still, drilling and other service costs continue to rise. Costs and commodity prices will be key.
"We look at our business as a portfolio. Over time we will sell off higher-cost properties and focus on lower-cost properties," Pinkerton said.
Analysts polled by Thomson Financial estimate that at $2 a share on 2008, Range will earn 18% more than last year. They expect earnings to rise only 2% in 2009 but 29% in 2010. |
