Range Resources (NYSE:RRC) and Cabot Oil & Gas (NYSE:COG) may call Texas home, but don't let the zip codes fool you. These independent oil and gas shops have deep roots in Appalachia and are feeling right at home in the race to unlock the mighty Marcellus shale.
Range Resources' first operations in the area date back to the 1970s, when predecessor Lomak Petroleum got its start. Cabot, as a spinoff of the eponymous chemical company, goes back over 100 years, to the days when the firm drilled gas wells in order to produce carbon black. Now, what's old is new again, with horizontal drilling and multi-stage fracturing technology breathing new life into the birthplace of the American oil and gas industry.
In case you're still wondering why you should care about the Marcellus, check out these rate of return estimates by Range:
|
Flat NYMEX Price (per Million BTU) |
Rate of Return |
|---|---|
|
$7 |
75% |
|
$6 |
60% |
|
$5 |
46% |
|
$4 |
34% |
|
$3.25 |
20% |
Figures from Range Resources' April 8, 2009 Hart Energy presentation and 2008 Annual Report. Assumed reserves of three to four billion cubic feet equivalent per well, and $3 to $4 million cost per well.
Those are simply killer economics, so long as you've got the right acreage. Considering their quality positions in the play, plus the solid hedges that both firms have in place, Range and Cabot are the envy of many a gas producer today.
Both firms just reported first-quarter earnings this week, so let's see what kind of headway these E&Ps are making, despite the headwinds of low commodity prices. So long as we're looking under the hood, let's also check out the firms' cost structures to make sure they're built for this environment.
Home on the Range
Range, a very technically savvy shop, got an early jump on the Marcellus play, drilling its first well into the formation in 2004. The management addition of Mark Whitley in 2006 really set Range's various horizontal drilling programs in motion. Whitley helped Mitchell Energy (acquired by Devon Energy (NYSE:DVN) earlier this decade) unlock the Godfather of Shale: the Fort Worth Barnett. Range just announced what it believes to be the highest 30-day initial production rate for any Barnett well. Considering that the competition there includes Chesapeake Energy (NYSE:CHK), XTO Energy (NYSE:XTO), and EOG Resources (NYSE:EOG), Whitley is clearly some kind of shale whisperer.
Range exited 2008 with 30 million cubic feet equivalent of daily gas production (Mmcfe/d) from the Marcellus and is looking to roughly triple that rate in 2009. The firm has been punching holes into the Marcellus at a pretty rapid pace -- so much so that the regional infrastructure buildout is hardly keeping pace. Fortunately, Range has found MarkWest Energy Partners (NYSE:MWE) to help it add gas processing and pipeline infrastructure to support this busy program. Cryogenic plants, for example, will help Range to extract more high-valued natural gas liquids from its hydrocarbon stream.
For the first quarter, Range cranked out 416 Mmcfe/d in total, with 82% of that production attributable to natural gas. Price realizations after hedges, which cover 83% of gas production for the balance of the year, came in at $6.62 per thousand cubic feet equivalent (mcfe).
As for cost structure, Range provided, in convenient form, all of the metrics that we need to calculate this. Note that some people prefer to exclude interest or corporate overhead (G&A), but let's be inclusive today. Combine the direct operating expense and production tax figures provided, and you've got $1.15/mcfe. Layer on G&A and interest, and you're looking at $2.36/mcfe. After depletion (DD&A) charges, Range's all-in costs roll in at $4.61, allowing it to net right around two bucks per mcfe of production, pre-tax. Not too shabby!
Cabot crackles
With a foothold in each of the two hottest resource plays in the country right now -- the other being the Haynesville -- Cabot's riding pretty high these days. Despite the hype potential, I do find this firm to be pretty conservatively run. The fact that last year's capital raise was the first since 2001 really grabbed my attention. Excessive equity raises have really turned me off of some of Cabot's competitors.
As far as Marcellus development goes, Cabot is at a slightly earlier stage than Range. The firm's got four horizontal completions under its belt now, with the most recent setting a new high. Having identified the Marcellus as its "most economic program," and with new rigs ordered for the region, Cabot is definitely committed to pushing this play forward.
In the first quarter, Cabot's high-priced hedges helped it achieve significantly higher price realizations than Range, at $7.51/mcf for gas production alone. Liquids appear to bump the overall take to $7.76/mcfe. This higher price allowed Cabot to realize a fatter pre-tax margin than Range, despite what I calculate to be a 10% higher cost structure for the quarter.
Of course, these figures bounce around from quarter to quarter, so keep monitoring these cost trends and hedge positions going forward. While I'm a bit more comfortable with Range as an operator, both of these shale players appear positioned to deliver strong economic returns in a lousy environment for natural gas.
