The recent IPO of Rice Energy (NYSE: RICE ) brought investors an exploration and production firm with substantial growth in the Marcellus shale. With all of the hype recently on cloud software and biotech stocks, the company hasn't gotten the deserved attention.
Rice Energy is a unique energy firm that claims to be the first of the shale generation with the youngest management team in the industry. The company has a highly concentrated acreage position in the core areas of the Marcellus and Utica.
For 2013, the company generated a 166% increase in natural gas production and is only running three horizontal rigs now. Rice Energy is innovative in its approach of focusing on lateral length as much as wells operated. With all of the key metrics moving in the right direction, the stock appears attractive compared to Marcellus leader Cabot Oil & Gas Corporation (NYSE: COG ) . In addition, due to an investment in a previous joint venture, Alpha Natural Resources (NYSE: ANR ) has the ability to ride the gains of Rice Energy for liquidity to survive the downturn in the coal market.
The growth metrics from Rice Energy are off the charts especially for a company with average fourth-quarter production of 154 MMcf/d. For comparison, Cabot Oil & Gas produced 1.2 Bcf/d in the Marcellus for the quarter, an increase of 67% over the prior year's comparable quarter. Rice Energy forecasts sustaining 100% production growth in 2014 with average net daily numbers to reach 260 MMcf/d and possibly all the way to 310 MMcf/d.
Drilling more wells and increasing the lateral length per well creates the huge growth rate. Over the last four years, the company only turned 37 wells into sales, and this year it has a goal of adding 44 net wells into production. On top of that growth, the average lateral length is growing from only 3,281 feet back in 2011 to 6,691 feet on the four wells brought online so far during 2014.
Worth noting, Cabot Oil & Gas only utilized on average five rigs to achieve its substantial production growth in 2013. Cabot's average lateral length in the Marcellus was only 4,666 feet with a maximum lateral length of 8,664 feet. In both cases, the numbers were higher than 2012. The company has added a sixth horizontal rig and plans to add another when infrastructure issues abate.
With other producers running into capacity issues on takeaway pipelines, it's interesting that Rice Energy has already locked in substantial transportation contracts for future growth. The company now has firm transportation contracts at 330 MMBtu/d, 654,000 MMBtu/d, and 761,000 MMBtud/d in 2014, 2015, and 2016, respectively. Based on these numbers, the company appears set to grow production more than 100% again in 2015.
Interestingly, Cabot actually cut capital spending plans for 2014 due to the infrastructure issues causing substantial price differentials in the Marcellus. The company had originally planned to move to seven horizontal rigs, but it has placed that move on hold until infrastructure catches up. Naturally, the company has substantially larger production to handle.
The substantial growth plans of Rice Energy make it a stock worth watching. The company offers a unique perspective of having a young management team with a lot of the executives in their early 30s. Compared to the $13 billion valuation of Cabot Oil & Gas, Rice Energy offers upside with its growth plans. Alpha Natural Resources now owns roughly $250 million worth of Rice Energy stock after obtaining $200 million worth of shares at the IPO price. The added value will help Alpha transition to a more sustainable coal future while others in the sector struggle with liquidity issues.
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