Natural gas industry observers will attest that growth in gas production from Pennsylvania's Marcellus shale has surpassed even the most optimistic of projections. And, according to a new report by a prominent investment research firm, Marcellus production growth won't be peaking anytime soon. Let's take a closer look.
The rapid growth in Marcellus gas production
Last year, natural gas output from the Marcellus surged 61% year over year to average 10.4 billion cubic feet per day, according to the U.S. Energy Information Administration. This phenomenal growth is thanks largely to major efficiency improvements resulting from a shift toward multi-well pad drilling, which allows energy producers to drill more wells from existing pads.
Not surprisingly, Marcellus-focused gas producers have delivered staggering year-over-year gains in production. For instance, Cabot Oil & Gas (NYSE: COG ) reported fourth-quarter net Marcellus production of 1,171 million cubic feet per day, up 67% from the previous year's fourth quarter, while Range Resources (NYSE: RRC ) grew its 2013 Marcellus production by 37% year over year, which helped fuel 25% growth in adjusted cash flow.
Similarly, Chesapeake Energy's (NYSE: CHK ) fourth-quarter production from the northern Marcellus grew 36% year over year and 7% sequentially to approximately 880 million cubic feet of gas equivalent per day, while CONSOL Energy (NYSE: CNX ) saw 56% year-over-year growth in fourth-quarter Marcellus production, as the company continues to make progress in its transition from coal to gas.
One of the main reasons these energy companies continue to drill in the Marcellus is because they can generate phenomenal returns even with relatively low gas prices. Cabot, for instance, can now generate pre-tax returns in excess of 100% at a wellhead gas price of only $3.00 per MMBtu, while Range and Chesapeake can earn triple-digit returns with $4.00 per MMBtu gas at the wellhead.
The future of the Marcellus
With these kinds of returns at such low gas prices, it's no wonder that these companies continue to drill heavily in the play. And if gas prices rise further, low-cost producers such as Cabot, Range, and Chesapeake will likely allocate additional capital toward the Marcellus.
As arguably the most economical gas play in the country, the Marcellus should see high levels of activity for a long, long time that should continue to drive robust production growth. According to a recent report by investment research firm Morningstar, Marcellus output will grow by a whopping 3 billion cubic feet per day this year and by another 2 billion cubic feet per day in 2015.
In addition to the play's attractive economics, some of the other principal factors expected to drive this growth include the play's high initial production rates, relatively shallow well decline rates, continued efficiency improvements from the application of new technologies, and energy producers' focus on the most productive zones of the play.
Based on an assessment of initial production rates, decline rates, and drilling and completion activity for almost 5,500 Marcellus wells in Pennsylvania and West Virginia, Morningstar concluded that Marcellus gross production will reach 14 to 20 billion cubic feet per day by the end of 2015. If achieved, that level of output would represent nearly a quarter of domestic gas production, up from about a fifth currently.
One stock to play continued growth in the Marcellus
Though continued strong production growth from the Marcellus generally bodes well for all low cost producers in the play, I think one company stands out as the biggest winner – Cabot Oil & Gas. The company is arguably the lowest cost producer in the play and is able to generate stronger returns than its peers even at a gas price of just $3.00 per MMBtu.
Further, Cabot stands to benefit tremendously from improvements in Marcellus infrastructure that should allow it to double its current production level by 2016. Further, with approximately 3,000 remaining drilling locations, the company has at least two decades of highly profitable growth left in the Marcellus, which should continue to drive exceptional growth in production, earnings, and cash flow.
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