It's safe to say that natural gas production from Pennsylvania's Marcellus shale continues to exceed even the most optimistic of forecasts. Despite the bitter cold that has halted much activity across the nation, gas drilling in the Marcellus has seen little impact.
According to the US Energy Administration's monthly drilling productivity report, Marcellus shale output surged by about 261,000 Mcf/d to a record 13.46 Bcf/d in December. That's a whopping 12% increase over October production levels of 12 Bcf/d and a roughly sevenfold increase since 2009.
With new infrastructure projects set to substantially improve takeaway capacity in the region this year, let's take a closer look at three Marcellus producers worth keeping a close eye on.
Cabot Oil & Gas
First up is Cabot Oil & Gas (NYSE: COG), one of the largest and most profitable producers in the Marcellus. Over the past three years, the company has delivered annual production growth in excess of 40%, which is just remarkable.
Thanks to its extremely low-cost structure, Cabot earns a roughly 115% before-tax internal rate of return, or IRR, on its typical Marcellus well even with a gas price of just $3.50 per MMBtu. And with a gas price of $4.50 per MMBtu, which is only about $0.25 higher than the average Henry Hub spot price during December, Cabot earns a whopping 195% before-tax IRR on its typical Marcellus well.
With the company's gross Marcellus production having recently surpassed the 1.5 Bcf/d mark, Cabot is targeting 30%-50% year-over-year production growth this year and plans to drill 130 to 140 net Marcellus wells with a seven-rig drilling program. Having already secured significant takeaway capacity and with roughly 3,000 remaining drilling locations in the play, I wouldn't be surprised if Cabot's gross Marcellus production surpasses the 2 Bcf/d mark this year.
Despite its aggressive push into ramping up oil production, Chesapeake Energy (NYSE: CHK) remains one of the largest and most active drillers in the Marcellus through its joint venture with Norway's Statoil (NYSE: STO), which purchased a 32.5% interest in Chesapeake's Marcellus acreage back in 2008. Despite takeaway capacity challenges, Chesapeake's third-quarter Marcellus production surged 53% year over year and 6% sequentially, coming in at approximately 825 mmcfe per day.
Looking ahead, the company's production should continue to grow at a rapid clip as new infrastructure projects are brought online. Chesapeake has already secured firm transportation contracts for roughly 550 mmcf/d of new Marcellus pipeline capacity that was brought online during the fourth quarter, including capacity on Kinder Morgan's (NYSE: KMP) recently expanded Tennessee Gas Pipeline.
These and other expansion projects should allow Chesapeake to boost production by connecting more wells to sales, which should help relieve its sizable backlog of 128 Marcellus wells that were either awaiting pipeline connection or in various stages of completion as of the end of the third quarter and help the company penetrate more attractive markets and improve gas price realizations.
Though it had traditionally focused on coal, CONSOL Energy (NYSE: CNX) is now a natural gas-focused company, after getting rid of five of its legacy coal mines. In its recently released 2014 capital program, the company reaffirmed its target of growing gas production by 30% this year and through 2016.
To achieve this goal, CONSOL will spend roughly $825 million of its $1.5 billion capital budget for the year on drilling gas wells in the Marcellus. Thanks to completions enhancements, the company has improved its initial production rates from dry gas wells by roughly 40%, which it believes will result in a 15%-20% improvement in well EURs. Not only will this help the company boost volumes now, but it will also allow it to extract more gas over the lifetime of the well.
Importantly, CONSOL is targeting both the liquids-rich and dry gas areas of the Marcellus, with plans to allocate roughly equal amounts of capital to each. Along with joint venture partner Noble Energy, the company expects to drill at least 162 gross Marcellus wells this year, of which 74 will be dry gas wells and 88 will target liquids-rich zones.
The bottom line
Though Chesapeake and Cabot haven't released their 2014 capital programs yet, CONSOL's implies that drilling activity in the Marcellus should remain robust this year. Looking beyond this year, major infrastructure expansions planned through 2016 should boost incremental takeaway capacity by 7.1 Bcf/d, according to Range Resources, giving operators plenty of room to ramp up production. Despite the drastic slowdown in other shale gas plays such as the Haynesville and the Barnett, the Marcellus is sure to remain brimming with activity for years to come.
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