The Upper Devonian Is a Shale Superstar

by Aaron Levitt | August 26, 2013 11:01 am

Everyone likes cake — thick layers of hot-out-of-the-oven goodness topped with rich butter cream icing. It’s enough to make to even the most hardened curmudgeon smile. And in the case of the energy industry, North America’s shale rock is like a big, sweet piece of seven-layer black forest cake.

The beauty of North America’s geology is how the various dense layers of rock are stacked upon each other like a sheet cake. This stacking provides plenty of pockets of rich natural gas and shale oil to tap using advanced drilling techniques.

Two delicious layers have already been discovered: the Marcellus and Utica shales in Pennsylvania, Ohio and West Virginia. Both have yielded vast hydrocarbon deposits and turned firms like Range Resources (RRC[1]) into household names.

However, for investors seeking the next big thing in shale, focusing on the icing on the top these respective formations could prove extremely profitable.

Meet the Devonian

Originally drilled in the late seventies, the Upper Devonian shale is once again receiving plenty of attention from the E&P industry as hydraulic fracturing breathes new life into old energy stomping grounds. The swath of shale rock actually sits above both the Utica and Marcellus across the states of Pennsylvania and West Virginia.

That’s a critical factor in why the Devonian could be a huge monster play over the long haul.

First, the shale field is a mixture of sandstone layers only about a few hundred feet above the more famous Marcellus — which is technically called the Lower Devonian. That enables the Upper Devonian to act like a catcher’s mitt for all the gas that has drifted up through the Marcellus over the years. The two shale layers are very similar and could offer a comparable mix of dry gas and natural gas liquids.

However, the shallower Devonian could be a bigger draw than its more prolific twin.

Being the top layer of our shale cake means that the kinds of pressures that formed the Upper Devonian weren’t as great as the lower Marcellus and Utica. Greater pressure along with higher temperatures can actually “cook out” all the oil and gas located in a deeper rock formation. That’s important because shallower rock has a better chance of being more “liquids-rich.”

Currently, demand for NGLs is rising fast because the byproducts are being used in a host of industrial applications as a feedstock. These natural gas liquids are also coveted by producers because their prices are tied to oil rather than dry gas.

Then there is its lower production costs to consider.

Given that it isn’t as deep or hard as the Marcellus, the Upper Devonian doesn’t require the millions of gallons of water, sand and other chemicals. Given the ease of fracking the formation — sometimes as little as about 50 feet below the surface — several producers in West Virginia has actually used straight hydrogen to get the job done.

And unlike several other fields — like the Bakken — getting Devonian production to market will be a much easier task. As the Marcellus as grown, so have the number of pipelines and gathering systems in the region. Upper Devonian producers should have no problems tapping into this growing network of midstream infrastructure.

While there have been no official reserve estimates or predictions from the Energy Information Administration, the potential for the Devonian to pay off big time for producers is certainly there. Only about 20 or so wells have been drilled into the formation, so this play is still in its infancy.

So Who Is Going To Win?

Chesapeake (CHK[2]), small-cap Rex Energy (REXX[3]) and coal/natural gas producer CONSOL Energy (CNX[4]) have all begun tapping the Devonian with great success, while the previously mentioned Range Resources has started on a project to drill through the Devonian, Marcellus and the Utica all from a single drill pad. Any of these firms could be big winners from the field.

However, the biggest could be EQT (EQT[5]).

After great results from early test wells — an average estimated ultimate recovery of 1.2 billion cubic feet per 1,000 feet drilled[6] — the E&P firm has made the Upper Devonian a major contributor to its future drilling and production plans. Like RRC, EQT is planning on drilling both the Marcellus and Devonian from a single well pad and has recently doubled the number of wells its plans to drill in the region to 22.

Yet there is still plenty of room for EQT to grow in the Devonian as well as the Marcellus.

Across the Appalachian Basin, the firm has drilling rights on nearly 3.5 million acres. That’s a huge amount of land for prospecting. More importantly, EQT estimates that its proven and probable reserves for its Upper Devonian holdings sit at an impressive 2.4 trillion cubic feet. Adding in the company’s low cost structure and existing midstream assets in the region — through its EQT Midstream Partners, LP (EQM[7]) subsidiary — and you have a recipe for success.

It’s easy to see why analysts have share price targets for EQT roughly $15 higher[8] than today.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

  1. RRC:
  2. CHK:
  3. REXX:
  4. CNX:
  5. EQT:
  6. 1.2 billion cubic feet per 1,000 feet drilled:
  7. EQM:
  8. roughly $15 higher:

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