A Far More Muscular Marcellus Shale Beckons

by Aaron Levitt | November 2, 2012 1:51 pm

It seems that America’s shale bounty[1] is the gift that keeps on giving. New research suggests that the U.S. has almost three times as much recoverable natural gas as previous government estimates. Data from more than 24,000 recently drilled wells shows 890 trillion cubic feet equivalent of recoverable natural gas.

While regions such as the Bakken, Eagle Ford and Permian basins all saw large reserve upgrades, one natural gas shale superstar received the biggest bump: Pennsylvania’s Marcellus Shale.

Analysts now peg the Marcellus as not only the largest natural gas field in the country but also the cheapest location for energy companies to drill. For energy investors, that makes the region a great place to stake to stake a claim for years to come.

The hydraulic fracturing and advanced drilling revolution[2] has helped push various shale formations into the energy lexicon. However, none is more synonymous with natural gas than the Marcellus. Lying across parts of Pennsylvania, West Virginia, Ohio and New York, the massive formation is home to a huge percentage of North America’s gas reserves — and its future potential is enormous.

Perhaps even more so after a series of independent research reports.

Recent white papers[3] from Standard & Poor’s and ITG Investment Research show the amount of recoverable gas in the Marcellus Shale may be much greater than earlier estimates. Earlier this year, the federal Energy Information Administration put Marcellus reserves were just 141 trillion cubic feet, significantly lower than the 410 trillion cubic feet down the EIA first calculated.

However, that lowered estimate doesn’t correspond with actual well production, according to the new research reports. Using actual production data from fracked wells in the region, ITG says the Marcellus contains two to three times as much gas. ITG pegs the figure at about 330 trillion cubic feet of gas, or more than double the size of the next largest field in the nation, the Eagle Ford[4].

At the same time, S&P’s report, How The Marcellus Shale Is Changing The Dynamics Of The U.S. Energy Industry, indicates that the region might contain as much as half of the entire nation’s proven natural gas reserves. It also points out that the shale field has some of the lowest all-in costs[5] and high percentage of natural gas liquids (NGLs). Additionally, S&P suggests that the Marcellus’ proximity to the Eastern Seaboard will ensure that it continues to boom.

Some analysts had suggested that the lowered EIA estimates supported various theories that production in the Marcellus might decline[6] more rapidly than expected. This would lead to far less profit for the various exploration and production (E&P) firms fracking the field. However, the actual well data cited by both studies indicate that on average, energy firms are producing more gas than expected. That prompted ITG to say that the fields “are grossly understated.”

The EIA defended its lowered estimates for the Marcellus because much of the field still hasn’t been tapped, which makes precise calculations impossible, and that its guesses where an “evolving process.” Still, the two new reports highlight the region’s continued potential for the energy industry and investors.

Marcellus’ Winners

Given the new research and higher reserve estimates, the Marcellus will remain America’s natural gas hot spot[7] for years to come.

S&P’s report makes the case that the Marcellus will particularly benefit two groups: 1) midstream and pipeline companies that are building or expanding infrastructure[8] in the Northeast and 2) E&P companies that produce natural gas and NGLs in the region. Both represent a great starting place for investors.

On the midstream front, master limited partnership MarkWest Energy Partners (NYSE:MWE[9]) could be a good fit. Aside from its operations in the Haynesville, Granite Wash and Woodford Shales, the company is the largest gas processor in the Marcellus. However, that role continues to grow as MarkWest has unveiled a huge capital spending budget focused on building new infrastructure[10] in the region. The firm estimates that its natural gas processing capacity in its Marcellus gathering network will reach 2.3 billion cubic feet per day in 2013 and 2.5 bcf by 2014. This expansion, plus other deals with producers like Range Resources (NYSE:RRC[11]) will help continue to fund the MLP’s rich 6% dividend.

And while Range Resources is the poster child for Marcellus growth, as its monster share price rise of the last few years and perpetual buyout potential[12] show — there are plenty of other producers as well. With roughly 520,000 acres and 2.9 trillion cubic feet of proved reserves, EQT (NYSE:EQT[13]) is one of Marcellus’ larger players. Likewise, Cabot Oil & Gas (NYSE:COG[14]) is one of the lowest-cost producers in the region. These, along with smaller E&Ps like Rex Energy (NASDAQ:REXX[15]), offer plenty of long-term potential as the field continues to pump out gas for years to come.

Overall, the new reserve reports highlight just how important the Marcellus is to our independence as well as our portfolios.[16]

As of this writing, Aaron Levitt didn’t hold any securities mentioned here.

Endnotes:
  1. America’s shale bounty: http://investorplace.com/hot-topics/energy-independence/
  2. advanced drilling revolution: http://investorplace.com/2012/09/3-plays-in-frackings-secret-ingredient/
  3. Recent white papers: http://www.google.com/hostednews/ap/article/ALeqM5hS8JHa82LbgGBN3GhlVAg4gTCTTg?docId=535162a5b4d84e558ea4f85c52a0f4d5
  4. the Eagle Ford: http://www.investorplace.com/2012/05/energy-independence-fracking-the-eagle-ford/
  5. lowest all-in costs: http://www.reuters.com/article/2012/10/15/idUSWNA750620121015?type=marketsNews
  6. decline: http://www.investorplace.com/2012/08/short-term-hedges-for-your-energy-bets/
  7. natural gas hot spot: http://investorplace.com/2012/10/how-to-play-the-progress-in-natural-gas/
  8. expanding infrastructure: http://investorplace.com/2012/10/3-income-pumping-pipeline-power-players/
  9. MWE: http://studio-5.financialcontent.com/investplace/quote?Symbol=MWE
  10. infrastructure: http://www.investorplace.com/2012/04/energy-independence-first-the-pipelines/
  11. RRC: http://studio-5.financialcontent.com/investplace/quote?Symbol=RRC
  12. perpetual buyout potential: http://investorplace.com/2012/11/whats-next-for-exxon-after-rosnefts-buy/
  13. EQT: http://studio-5.financialcontent.com/investplace/quote?Symbol=EQT
  14. COG: http://studio-5.financialcontent.com/investplace/quote?Symbol=COG
  15. REXX: http://studio-5.financialcontent.com/investplace/quote?Symbol=REXX
  16. our portfolios.: http://investorplace.com/2012/09/get-ready-for-a-fourth-quarter-sale-on-energy-stocks/

Source URL: http://investorplace.com/2012/11/a-far-more-muscular-marcellus-shale-beckons/
Short URL: http://invstplc.com/1fp4Vlj