Contained within Range Resources'
It seems like only yesterday that the Barnett was the bee's knees, but the granddaddy of shale gas is now a relatively mature play. Operators like Range, EOG Resources
Still the one
By divesting its Barnett position, Range Resources is essentially doubling down on the Marcellus. It's not hard to see why. At flat $5 natural gas prices, the Barnett generates an estimated 32% internal rate of return. In the Marcellus, the company's IRR estimate is 79%. One major perk is that play's proximity to the Northeastern gas market, which commands a premium relative to other parts of the country. The southwestern core of the Marcellus is also rich in liquids, which gives price realizations a big boost.
Meanwhile, the Appalachian giant offers as much as 20 times the resource potential as the Barnett. The Marcellus is meaty on its own, but other stacked plays in the region, such as the Upper Devonian, provide extra gravy. A recent Upper Devonian horizontal well tested at more than 5 million cubic feet per day.
... but not the only one
While the Marcellus will no doubt get even more love from the company going forward, Range has made it clear that it doesn't want to be a "one-basin company." To that end, there are a few other plays quietly creeping into Range's portfolio. A new oily Woodford program, for example, has seen two recent well completions, each testing in excess of 1,000 barrels of oil equivalent per day (up to 70% of which are liquids). These wells pack huge estimated reserves, at 1.3 million barrels of oil equivalent, and are relatively inexpensive, at $4 million to drill and complete. Range estimates that its Woodford wells offer an IRR of nearly 100%, based on the 12-month futures curve (or "strip" pricing). The downside here is that Range's position is small, at just 7,800 net acres.
How much for that Barnett in the window?
As far as what kind of proceeds Range can expect for its Barnett assets, there are a few transactions we can look to for a guide. EV Energy Partners
I would expect Range to catch a premium for its Barnett acreage, relative to the EVEP transaction. We know the company got $13,000 per flowing mcfe in its Ohio sale. I think $1.5 billion is a pretty reasonable expectation here. That's roughly 20% of Range's current enterprise value, and represents a huge injection of cash.
I'm thinking this sale makes a lot of sense for Range, but I'm open to other opinions. Is the company setting itself up for greatness, given the size of the Marcellus prize, or disappointment, given the uncertain regulatory environment? Sound off in the comments section below.
Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Fool owns shares of Denbury Resources and Devon Energy. The Motley Fool has a disclosure policy.
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