Are Companies Giving Up on This Shale Gas Play?

How depressed gas prices have resulted in a sharp drop-off in drilling activity in North Texas’ Barnett shale play.

Jan 8, 2014 at 11:00AM

One of the biggest trends within the energy exploration and production space over the past few years has been the diversion of capital away from natural gas plays to oil-rich plays, due largely to the slump in natural gas prices since 2010.

With most energy producers still finding it more profitable to drill in liquids-rich plays, only the most economical shale gas plays have seen strong activity, with Pennsylvania's Marcellus shale being the most notable. By contrast, drilling activity in less economical gas plays has declined sharply over the past few years.

A case in point is the Barnett Shale of North Texas, where drilling activity recently plunged to its lowest point in a decade. Let's take a closer look.

Plunging activity in the Barnett
According to data from the Texas Railroad Commission, the number of drilling permits issued in the Barnett during the first eleven months of 2013 fell to 827, down sharply from 4,065 permits issued in 2008 and the first time since 2003 that Barnett permits have fallen below 1,000.

Through December 2013, companies drilled a total of 784 wells in the play, down from a record high of 3,594 in 2009 and down from 840 in 2012. Not surprisingly, Barnett production declined 6.5% year-over-year to average 5.36 billion cubic feet of natural gas a day in 2013.

Several of the largest drillers in the play have drastically curtailed drilling activity in the play, and the few that remain are mainly focused on the liquids-rich areas of the play. EOG Resources (NYSE:EOG), for instance, only has three rigs running in the play, and drilled 145 Barnett wells in 2013, a sharp reduction from previous years. The main reason the company is still drilling in the play is because of its large acreage position in the Barnett Combo Play, which is rich in crude oil and natural gas liquids.

Similarly, Devon Energy (NYSE:DVN), which has been -- and still is -- one of the largest producers in the Barnett, completely curtailed dry gas drilling in 2013 in favor of ramping up liquids production. In 2013, the company drilled approximately 180 new Barnett wells, down 44% from 322 wells in 2012. With Devon's weighted average production costs for both gas and liquids in the Barnett currently estimated to be $3.91 per thousand feet equivalent, natural gas and NGL prices would have to rise significantly in order for the company to divert capital away from its liquids-rich plays.

Lastly, Chesapeake Energy (NYSE:CHK), once a major driller in the Barnett, has also severely curtailed its operations in the play due to the relatively poor economics of its drilling program there. It is currently operating two rigs in the Barnett, down from 12 in 2011. Going forward, the company will likely continue to focus the largest portion of its capital on liquids-rich opportunities in the Eagle Ford and the Greater Anadarko Basin, which will be the key drivers of its oil production growth.

A tale of two shales
The monumental decline in Barnett drilling activity is due largely to low gas prices and the fact that the play's economics aren't nearly as good as the Marcellus shale's. With natural gas prices at $4 per MMBtu, the Marcellus can generate an internal rate of return (IRR) of about 20%, while other gas plays, including the Barnett, Haynesville, and Fayetteville shales, require a gas price of roughly $5 per MMBtu to generate the same IRR, according to Bentek Energy LLC, an energy market analytics provider.

It shouldn't come as a surprise, then, that Marcellus production surged more than 70%, from 7 billion cubic feet of gas per day in 2012 to 12 billion cubic feet in October 2013, while Barnett production declined 6.5% in 2013. Not surprisingly, Marcellus-focused drillers such as Cabot Oil & Gas (NYSE:COG) and Range Resources (NYSE:RRC) delivered record production numbers last year.

In the third quarter, Cabot reported a 61% year-over-year increase in production and attained a record gross production rate of 1,295 Mmcf per day, while Range delivered a 21% year-over-year increase in production volumes, which reached a record high of 960 Mmcfe per day.

The bottom line
The sharp drop-off in Barnett drilling activity highlights just how quickly a downturn in commodity prices can render a play uneconomical. If the number of drilling permits issued in the Barnett through the end of 2013 is any indication, drilling activity and production are likely to remain subdued in 2014. Only a sustained rebound in natural gas prices above $5 per MMBtu may motivate companies to meaningfully boost activity in the play. Until then, investors can expect the Barnett to remain relatively quiet and uninteresting.

While gassy plays such as the Barnett have quickly fallen out of favor, liquids-rich shale plays such as the Eagle Ford and Bakken continue to drive 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.

Fool contributor Arjun Sreekumar owns shares of Chesapeake Energy and Devon Energy. The Motley Fool recommends Range Resources. The Motley Fool owns shares of Devon Energy and EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information