A Marcellus shale well in Pennsylvania. Photo credit: Flickr user Nicholas A. Tonelli.
The Marcellus shale is already the biggest natural gas field in the world, but it's about to get a whole lot bigger. As it does, energy companies and their investors are poised to reap billions of dollars in profits. In fact, according to energy research firm Wood Mackenzie, the top 20 companies in the Marcellus stand to pull in an $86 billion fortune over the remaining life of the play. That's after costs and might even be on the low side if natural gas prices pick up.
A look at the mighty Marcellus shale
This month, energy companies were pumping out 15.6 billion cubic feet of natural gas per day from the Marcellus shale. That was 38% of America's total daily natural gas production for August and represents enough natural gas to meet the energy needs of more than 150,000 homes for a full year. And production is expected to surge another 25% to a peak of 20 billion cubic feet per day by 2020.
Even with natural gas prices low these days, energy companies continue drilling because they can still make a fairly tidy profit. This is true even in some of the weaker spots of the play, while companies in the Marcellus' hot spots are enjoying strong returns.
How to play the Marcellus shale
That $86 billion cited by Wood Mackenzie will not be split evenly among the play's top 20 producers. This is because certain companies are more focused in the best spots of the play. Let's look at those with the potential for earning an outsized portion of that fortune.
One company with enormous resource potential is Range Resources (RRC 1.41%), which has amassed nearly 1 million net acres in the Marcellus shale and believes it is sitting on upward of 51 trillion cubic feet of natural gas equivalent. That would be enough gas to meet the needs of 50 million households for the next 15 years.
The following slide shows the two best spots in the play, along with Range Resources' acreage locations.
Source: Range Resources Investor Presentation.
Range Resources earns an internal rate of return in excess of 100% at current prices for wells it drills in southwestern Pennsylvania.That, when combined with the company's goal to grow its production by 20%-25% per year, will have it cash flow positive by 2016, with increasing cash flow each year thereafter. Once that happens, cash could start flowing back to investors in large doses via rapidly growing dividends.
Cabot Oil & Gas (CTRA 1.95%) has acreage in some of the best spots in the northern part of the Marcellus. This has given the company peer-leading rates of return in the shale, which pushed its discretionary cash flow up 30% in the past year. This is excellent news for investors, as Cabot Oil & Gas' growth should be sustained by a 25-year inventory of future well locations at its current drilling pace.
Also seeing strong growth opportunities in the Marcellus is EQT (EQT 1.19%), which believes its acreage in the region holds upward of 36.4 trillion cubic feet of natural gas equivalent. The economics of extracting that gas are excellent, as EQT earns internal rates of returns in excess of 50% with natural gas prices above $4 across its vast acreage position.
The final company I'll note is Antero Resources (AR 1.49%). The Marcellus-focused driller believes it is sitting on 26.4 trillion cubic feet equivalent of natural gas in its core position in the shale. It estimates that this resource is worth $19.4 billion to the company if it can all be extracted at current prices. If gas prices head higher in the future, so will Antero Resources' profits.
Investor takeaway
Investors have many options when seeking their share of the Marcellus shale's fortune. This is because top drillers in the play are sitting on an unbelievable amount of natural gas that can be profitably extracted even at current prices. Investors should really think about adding a Marcellus producer to their portfolio, as there is nearly $90 billion in future fortunes to be made from the play.
