Why the Marcellus Is Marvelous

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Last month, we saw natural gas giant Williams (NYSE: WMB) make multiple moves on the Marcellus shale play, via joint ventures with Atlas Pipeline Partners (NYSE: APL) and Rex Energy (Nasdaq: REXX). In case it wasn't abundantly clear how enticing this resource play is, Range Resources (NYSE: RRC) recently made the Marcellus' value as plain as the nose on your Foolish face.

Using data from its 24 horizontal Marcellus shale wells that have produced for more than 120 days, Range Resources recently assembled an updated model of average expected well performance, costs, recoverable reserves, and rates of return in the play. In the biz, this is known as a "type curve." This type curve is simply top-notch.

In the past, Range Resources has talked about expecting to average 3 billion to 4 billion cubic feet equivalent (Bcfe) of reserves per well in the Marcellus, located in the Appalachians. So far, the average well is tracking higher, at 4.4 Bcfe. At a well cost of $3.5 million (somewhat higher than in the Fayetteville or Barnett shales, but less than half the cost of a Haynesville horizontal) and assuming a flat $6 price for natural gas on NYMEX (the New York Mercantile Exchange), the rate of return for these wells is modeled at 64%. Dropping the gas price to $5 keeps the rate of return at a robust 50%.

No wonder Williams was eager to step in here, as was StatoilHydro (NYSE: STO), which signed a major joint venture agreement with Chesapeake Energy (NYSE: CHK) late last year. Nor is it surprising that Talisman Energy (NYSE: TLM) has increased its Marcellus drilling program from 36 to 50 wells this year. Based on these updated numbers, I don't think Range Resources is far wrong in its belief that this is the best large-scale, repeatable play in the U.S.

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