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LNG Exports Could Breathe New Life Into This Out-of-Favor Shale Gas Play

While cheap and abundant U.S. shale gas has been a major boon to consumers and energy-intensive businesses, it has been a curse to higher-cost shale gas plays like the Haynesville and the Barnett. The Haynesville, for instance, has seen its rig count plunge from a high of 139 to just around 20 currently.

But according to a recent report by consultancy ICF International, greater demand for natural gas from LNG exports and regional utilities could help the play return to its former glory. Let's take a closer look at why this could benefit major Haynesville operators.

Photo credit: Chesapeake Energy.

A Haynesville revival?
The Haynesville, a shale gas formation located in the North Louisiana Salt Basin in northern Louisiana and eastern Texas, was one of the hottest shale gas plays back in 2008. But the downturn in gas prices after 2009 and especially after 2011 caused a massive exodus from the play, as energy producers were forced to curtail uneconomic dry gas drilling in search for liquids-rich opportunities.

But higher gas prices and growing demand from LNG export projects, electric utilities, and Gulf Coast petrochemical plants could give energy companies incentive to ramp up drilling activity in the play, according to ICF. Indeed, the only two LNG export facilities to have won final approval from federal regulators so far are both planned in Louisiana.

Growing demand from LNG exports and utilities
The first project is Cheniere Energy's (NYSEMKT: LNG  ) Sabine Pass facility, which was granted approval back in 2012, while the second is Sempra Energy's (NYSE: SRE  ) Cameron LNG project, which was given the green light earlier this month. These are truly massive projects that will demand a lot of natural gas. Sabine Pass, for instance, has already inked long-term contracts with customers around the world to sell roughly 16 million metric tons of LNG per year.

Similarly, Cameron LNG will have an export capacity of 12 million tons of LNG per year. Sabine Pass will consist of four LNG processing units, or trains, the first of which is expected to commence operations in the second quarter of 2015, while the fourth is slated for start-up in early 2017, while Cameron will have three trains and is expected to commence full commercial operation in 2019.

In addition to LNG exports, utilities and Gulf Coast petrochemical plants in the Southeast will provide additional demand for Haynesville gas production. According to some estimates, regional demand is forecast to grow at an annual rate of 1 trillion cubic feet over the next decade.

Companies that stand to benefit
If ICF's predictions pan out, major Haynesville producers such as Chesapeake Energy (NYSE: CHK  ) , EXCO Resources (NYSE: XCO  ) , and Freeport-McMoRan (NYSE: FCX  ) could be major beneficiaries. Chesapeake already plans to boost its Haynesville rig count from an average of four in 2013 to seven to nine rigs this year, as higher gas prices and major cost reductions have made the company's operations more profitable.

After slashing its well costs in the play from $10.3 million per well just a couple of years ago to an estimated $7.9 million per well currently, Chesapeake now earns an estimated 69% rate of return at a wellhead gas price of $4.50 per MMBtu. With an estimated 10 trillion cubic feet of recoverable gas reserves, the company's potential in the play in unparalleled.

EXCO, which commands 70,000 net acres in the play, is another potential winner. Like Chesapeake, the company has drastically reduced its Haynesville well costs from $9.5 million in 2011 to $7.2 million as of year-end 2013. At current gas prices, it earns a solid internal rate of return of more than 20%. With an estimated 600 remaining drilling locations in the play -- a figure that could double as gas prices rise -- EXCO has ample room for growth.

Lastly, Freeport-McMoRan believes it is sitting on 5 trillion cubic feet equivalent of recoverable natural gas reserves in the Haynesville. While the company isn't currently producing any gas from the play, unlike Chesapeake and EXCO, it estimates it has 11,000 future drilling locations that can be drilled if gas prices improve.

OPEC is absolutely terrified of this game-changer
As the improving outlook for the Haynesville shale highlights, America's domestic energy landscape is changing radically. U.S. oil and gas production continues to surge as our country moves closer to energy independence. And there is one company front and center that is poised to make its investors rich. Warren Buffett has already committed to it, and you can, too. Click here to learn about this company in The Motley Fool's special report: OPEC's Worst Nightmare.

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  • Report this Comment On November 18, 2014, at 5:04 AM, TimoDOZ wrote:

    Another name to watch in the region from where LNG exports will be occurring is GDP. "IF" the speculative GDPAN continues meeting it's dividend obligations it will start responding to the .TNX more than the CVT feature to GDP? Western Alabama Tuscaloosa shale E&P a likely target.

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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