If you've followed our Foolish coverage of the energy sector this year, you might be sick of hearing about the Barnett shale. In case you're just tuning in, however, here's the one-sentence rundown, courtesy of Chesapeake Energy (NYSE: CHK ) , the No. 3 producer in the play: "The Fort Worth Barnett Shale is the largest and most prolific unconventional gas resource play in the U.S."
Excellent. Now that we've got that out of the way, let's talk about finding the next Barnett shale -- in other words, the onshore domestic resource play with the most transformational potential for the natural gas gang.
Talkin' bout rocks and stocks
There is certainly no shortage of contenders. With the success of the Barnett, there's been an explosion of activity in shale plays from Alabama to Illinois to New York.
Southwestern Energy (NYSE: SWN ) has been terrifically successful in Arkansas' Fayetteville shale, one of the better-known baby Barnetts. The company has guided its production 54% higher for the year, with nearly half of that coming from this Arkoma Basin shale. Chesapeake is the second-largest leaseholder in what it defines as the core of the play. (They're just about everywhere that matters, as you'll see).
Like the Barnett, the Fayetteville is a Mississippian-aged shale, dating back more than three hundred million years. In order to get to what I believe is an even more promising geological formation, though, we need to turn the clock back just a bit further, to the Devonian era. In that period, a lot of algae died and fell to the bottom of a sea that covered what is now the eastern half of the country. Thanks to our fallen eukaryotic forebears, we have the opportunity to pump natural gas out of the resulting carbon-rich source rock. Illinois' New Albany shale, Michigan's Antrim shale, and Appalachia's Marcellus shale all date from this period.
Tell us about Marcellus
The last of those three is the one that has caught my eye. For one, the Marcellus is huge, stretching northeast from West Virginia, on up through a large swath of Pennsylvania, and into Western New York. Ross Smith Energy group estimates that the Marcellus is anywhere from two to four times bigger than the Barnett.
Generally, Appalachian gas is "dry," or high in methane content, so it requires minimal processing at the wellhead. Its high Btu content and proximity to the gas-hungry Northeast enable it to sell at a premium to the NYMEX benchmark price. This is like a less drastic version of the divide between Appalachian and Western coal.
So the Marcellus shale appears to be a source of abundant, high-quality natural gas. The fact that it's just now being exploited may be a bit mystifying, especially since the resource has been known for ages. The main historical obstacle has been technological, and two major advances have made the Marcellus' development possible.
Shales are, quite literally, a tough nut to crack. They have to be fractured successfully in order to get economic quantities of gas to flow. These "frac" techniques have advanced to the point at which multiple fractures can be made along the length of the well in a single pass. Shales also tend to extend laterally, so that's the shape a wellbore needs to take in order to hit the most pay. This is called horizontal drilling.
So who's getting rich?
OK, I know you're feeling the claustrophobia of the classroom walls. Enough rock talk. How do we make some money on this play?
Well, Chesapeake is up to its usual tricks, grabbing massive tracts of land in the Appalachians. Its millions of acres aren't all prospective for the Marcellus (there are other targets in the region), but when all is said and done, I believe Chesapeake will probably emerge with the largest leasehold in this play.
Seneca Resources, the E&P subsidiary of National Fuel Gas (NYSE: NFG ) , has established a joint venture with EOG Resources (NYSE: EOG ) , one of the Barnett Shale heavyweights. National Fuel looks like a boring utility to the casual observer, so this company, with its significant acreage position, is a bit of a sleeper pick.
Other technically savvy mid-cap players marching on the Marcellus include Range Resources (NYSE: RRC ) , which has already drilled some promising horizontals, and Southwestern, which should be a familiar name. Smaller companies include high-yielding Atlas Energy Resources (NYSE: ATN ) , which packages its drilling programs into fee-based partnerships, and Exco Resources (NYSE: XCO ) , which is backed by none other than Boone Pickens.
Atlas actually has the busiest drill program I know of, with 120 vertical wells planned over the next 18 months. Still, I'm most intrigued by the more challenging, and potentially more lucrative, horizontal completions to be achieved. For that reason, I'm primarily eyeing the aforementioned mid-cap operators.