The Marcellus shale first crossed my radar in late 2007, at which time I dubbed it the next great gas play. Before too long, major media outlets began hitting on the massive potential here, and the Marcellus has been hogging energy headlines ever since. Here's a roundup of a few of the most recent highlights.
Flashy gas flows
On the development front, National Fuel Gas (NYSE: NFG) subsidiary Seneca Resources announced a pair of eye-popping initial production rates in Pennsylvania. One, operated by joint venture partner EOG Resources (NYSE: EOG), reportedly flowed at a 24-hour rate of 8.9 million cubic feet per day, while a Seneca-operated well clocked in at 15.8 million per day. For context, Cabot Oil & Gas saw an average 24-hour IP (initial production) rate of 7.5 million per day for Marcellus wells completed in 2009, and one of its recent completions IP'd at 18.4 million per day.
You know how I feel about 24-hour initial production rates. There is no standardization, and the results of a single well can easily be overhyped. Seneca's rates aren't so high as to be suspect, but the release of these results in tandem with the announcement that Seneca has hired an investment bank to shop around a joint venture interest in a broad swath of its Marcellus acreage still smacks of showmanship. It reminds me a bit of an operator that cashed in on the Haynesville hoopla late last year following a big well test by partner Devon Energy.
Another Asian buyer
We've seen a steady stream of joint venture deals in the Marcellus, such as Chesapeake Energy's (NYSE: CHK) tie-up with Statoil (NYSE: STO) and Carrizo Oil & Gas' more recent partnering with India's Reliance Industries. This week, Gastar Exploration (AMEX: GST) joined the JV party.
Korean investment firm Atinum Partners has agreed to earn a 50% interest in Gastar's 34,200 net acres of Marcellus shale leasehold by paying $30 million in cash and carrying $40 million of Gastar's future drilling costs. While the per-acre valuation of around $4,100 comes in far below what firms like Anadarko Petroleum (NYSE: APC) and Atlas Energy have netted from hungry Asian partners, Gastar wasn't bargaining from a position of strength. The company doesn't have much cash on its balance sheet, so this is still a very positive development for the small firm.
Get the frac out of here
Of course, any Marcellus roundup wouldn't be complete without a bit of environmental controversy. As I wrote last year, this play has become the country's frac battleground. Many perceive the hydraulic fracturing process, which bombards the wellbore with large volumes of water and sand, along with a mixture of salts, acids, and other chemicals, as threatening regional water supplies. This has led Range Resources (NYSE: RRC) to take the lead in disclosing the chemicals used at each well site. Some regulators aren't taking any chances, though.
Back in May, the Delaware River Basin Commission issued a temporary ban on new drilling permits in the four-state basin while it crafts new regulations. In response, operators like Newfield Exploration suspended leases in the area, which includes northeastern Pennsylvania.
Over the past week or so, some signs have pointed to an easing in some of the DRBC's most restrictive proposed measures. Early drafts had required a $5 million assurance bond for each well site, which would have locked out all but the industry's heaviest of heavyweights. That requirement is reportedly being scaled back. On balance, though, this region will likely be a tough place to operate once the regulatory dust has settled.
For those of you investing in the Marcellus shale, I would probably suggest sticking to counties in Pennsylvania and West Virginia where drilling is already well-established, rather than stretching out into areas where the industry might be unwelcome.
