The Shale Play Single-Handedly Holding Natural Gas Prices Down

Over the past few years, the surge in U.S. natural gas production made possible by the widespread application of horizontal drilling and hydraulic fracturing has kept the price of the commodity severely depressed. As a result, most energy companies with the flexibility to drill for crude oil and other liquids have opted to divert capital away from dry gas drilling and toward liquids-rich drilling.

Yet, incredibly, US natural gas output continues to surge. According to the U.S. Energy Information Administration (EIA), gas production this year is up by roughly 1.5%. Not surprisingly, prices have fallen over the course of the year, from an April high  of around $4.40 per thousand cubic feet (Mcf) to around $3.60 per Mcf currently. What gives?

The Marcellus continues to impress
At the risk of oversimplifying, it really comes down to a single, highly prolific shale gas play – the Marcellus. Even as production from other US shale fields has fallen, output from the Marcellus continues to grow. According  to Bentek Energy, an energy market analytics firm, Marcellus production from Pennsylvania and West Virginia has jumped 50% year-over-year. By comparison, output from the Haynesville shale of Louisiana and Texas has fallen 21%.

In fact, the tremendous growth in production from the Marcellus has even led some analysts to lower  their expectations for US natural gas prices. "We believe it may now be hard for US natural gas prices to push much higher than the current $3.90/MMBtu in [calendar year 14], and see some downside risks to our $4.20/MMBtu for next year," wrote Bank of America commodities analysts in a note to clients.

The reason many companies continue to drill in the Marcellus despite depressed gas prices is because of the play's superior economics and also because of its high natural gas liquids (NGLs) content. An assessment  by Standard & Poor's last year found that the Marcellus is easily the most economical shale gas play in the country. With natural gas prices of $3.50 per MMBtu, Marcellus 'dry gas' wells generate an internal rate of return (IRR) of around 12%, while Marcellus "wet" gas wells generate an IRR of close to 30% due to the higher revenues associated with NGLs, according to the ratings agency.

4 companies driving Marcellus output growth
Some of the companies driving this tremendous production growth include Chesapeake Energy (NYSE: CHK  ) , which owns roughly 100 ,000 net acres in the highest-quality portion of the Northern Marcellus and is currently one of the largest  gas producers in the region. In the second-quarter, the company grew its dry gas production in the Marcellus by 58% year-over-year and wet gas production by 56%. 

EQT (NYSE: EQT  ) is another company seeing phenomenal growth in the Marcellus, reporting a whopping 111 % year-over-year increase in Marcellus gas sales, which allowed the company to nearly double its operating cash flow from the same quarter a year earlier. Meanwhile, Cabot Oil & Gas (NYSE: COG  ) , grew production by 52 % year-over-year to a record 95.2 Bcfe, thanks largely to solid operational results in the Marcellus.

And finally, Range Resources (NYSE: RRC  ) , which commands a whopping 1 million net acres in the Pennsylvania Marcellus, also reported a 27 % year-over-year increase in production volumes, which averaged 910 Mmcfe per day in the second quarter.

What's next for the Marcellus?
Going forward, natural gas production from the Marcellus is expected to continue growing, as infrastructure constraints in the play ease up. Second-quarter results from Cabot, Range, and other Marcellus producers highlighted the issue of backlogged wells – those that have been drilled but are not currently producing, mainly because they lack pipeline connection.

In the first half of this year, the number of backlogged wells in the Pennsylvania Marcellus increased 8 % year-over-year to 1,546. But as these backlogged wells are connected to pipelines and brought online over the next several months, production growth this year could top even last year's levels.

More compelling companies 
Cabot, Range, EQT and Chesapeake aren't the only companies benefiting from the record oil and natural gas production that's revolutionizing the United States' energy position. That's why the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


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