by Aaron Levitt | March 17, 2014 10:00 am
At this point, everyone knows just how powerful the shale revolution has been for America and the various energy stocks tapping that abundance. What’s surprising is just how much oil and natural gas these formations continue to pump out.
Take Pennsylvania’s mammoth Marcellus shale, for example.
Already the kingpin of America’s natural gas production, the Marcellus is poised to boom, according to a new study. According to analysts at Morningstar (MORN), the formation will pump out 14 to 20 billion cubic feet per day by the end of 2015. Putting that into context, the Marcellus shale will be the biggest driver of domestic dry gas production growth and will represent 25% of all U.S. gas production by 2015.
That’s a heck of a lot of gas.
It’s also a ton of profits for the various E&P firms tackling the play. Here are five of the best energy stocks to buy now for betting on the mammoth Marcellus output.
For investors looking for energy stocks in the Marcellus shale, the first stop has to be Range Resources (RRC). The firm holds one of the largest acreage positions in the region — around one million acres — and continues to be king in terms of production. In fact, RRC managed to increase its full production in 2013 by 25% over 2012’s numbers.
But RRC isn’t resting on its laurels.
Range continues to prospect on its properties and estimates that it has the potential to grow its proven reserves from a current 8.2 trillion cubic feet (Tcf) to a monster 64 Tcf. The other key for that reserve growth is that RRC’s sizable position in the Marcellus shale has it in the more profitable liquids producing regions of the play. Natural gas liquids (NGLs) production continues to grow at RRC — it was up 35% vs. last year’s numbers.
This production growth — along with some of the lowest costs around — have helped RRC stock generate constantly higher profits. Analysts predict that RRC stock will grow earnings per share by an average of 34% over the next five years. That makes RRC stock a powerful buy in the Marcellus.
Small-cap producer Rex Energy (REXX) continues to be a workhorse in the Marcellus shale. REXX continues to surprise even its own management with just how much natural gas and NGLs it continues to frack. For the recently reported fourth quarter, REXX saw it daily production jump 49% compared to a year ago. At the same time, full year production rose 38% throughout all of 2013.
And management is predicting a 57% jump in production this year.
Believe it or not, REXX may just beat management’s expectations once again. The company recently upped its capex budget to focus on adding additional liquids production in the Marcellus. It should be quite successful at doing that, as its acreage in the play straddles much of the same areas as the previously mentioned RRC.
Rex Energy currently isn’t profitable — based on a recent earnings miss. However, REXX stock does trade at relatively cheap forward price-to-earnings ratio of around 18. And with a market cap of less than a $1 billion, REXX stock is perfect buyout bait for a larger firm.
Holding nearly 580,000 gross acres and 8.3 Tcf worth of proved reserves, EQT (EQT) could be one of the best energy stocks to play the Marcellus shale. Aside from the 14,000 wells it owns in the entire basin, EQT has a few aces up its selves.
First is EQT’s exposure to Devonian shale. This play basically lies on top of certain parts of the Marcellus shale and is equally as prolific. EQT is planning on drilling both the Marcellus and Devonian from a single well pad. That will enable it essentially double its production from it well, while only realizing a slight bump in production costs.
The second piece to EQT’s success is its pipeline MLP subsidiary EQT Midstream (EQM). EQT stock has been able to “drop down” gathering and natural gas transportation assets it uses into EQM in return for plenty of tax-friendly distributions. EQT basically pays a fee to use these pipes, then kicks much of that back as a dividend from the MLP.
At the end of day, EQT stock could be one of the best all-around and most consistent energy stocks in the entire Appalachian region.
Rice Energy (RICE) could be one of the more interesting energy stocks operating in the region. While RICE is fresh off its IPO, its pedigree stretches far back.
The E&P firm was founded by Daniel J. Rice back in 2007. Before founding the producer, Rice spent several years managing energy assets for monster investment bank BlackRock’s (BLK) institutional clients. During that time, Rice managed to beat 99% of all U.S. stock-fund managers according to Bloomberg.
Rice used the same focus to set up Rice Energy, and the firm now controls drilling rights on 43,350 net acres in the Marcellus shale and 46,490 net acres in Ohio’s Utica shale. Wells on that acreage produce about 161 million cubic feet of natural gas per day.
For investors, RICE stock offers a chance to play a small and early-stage producer with actual real assets in the region. And RICE continues to grow those assets. The firm recently purchased $110 million worth of midstream and gather facilities in the Marcellus shale. That purchase is prompting analysts that believe that RICE will go the EQT route and move those assets into an MLP.
While the bulk of Southwestern Energy’s (SWN) assets are located in prolific Fayetteville shale, the firm is no slouch in the Marcellus shale, either. SWN owns 337,300 net acres in play and has been active there since 2007.
That acreage in the Marcellus is helping SWN drive its production increases. Production in the Marcellus jumped a whopping 151% this year versus last year and helped offset production declines in the Southwestern’s Fayetteville assets. Overall, SWN managed to show an overall 18% year-over-year increase in production to reach 177.0 billion cubic feet (Bcf) of production. Those Marcellus assets also helped the firm beef up its total reserves, and SWN’s replace ratio for 2013 stands at 550%.
Yet, despite the great production and reserve numbers, investors abandoned SWN stock in spades — with shares falling about 4% on its earnings report. This was mostly due to the fact that it has more dry gas reserves than before.
For more forward-thinking investors, SWN stock could now be one of the biggest values among the Marcellus shale energy stocks. SWN stock is pretty cheap on a forward P/E basis of 17. It looks even cheaper when you consider that its natural gas holdings will be worth more as prices for natural gas continue to rise.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2014/03/energy-stocks-rice-eqt-rrc-rexx-swn-marcellus-shale/
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