Contained within Range Resources' (NYSE: RRC) earnings press release Wednesday was the announcement that the Fort Worth-based E&P is putting its Barnett shale assets on the block. This planned divestiture covers 53,000 acres, 80% of which lies in the "core" of the play, which lies right in Range's backyard. At year end, Range said it had 131,700 net acres, so unless I missed a large sale over the past few quarters, it looks as if the company let 60% of its Barnett leases expire this year.
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 (NYSE: EOG), and Devon Energy (NYSE: DVN) cut their teeth here, and then fanned out across the continent, searching for analogues. Range was one of the earliest to hit upon the Marcellus Shale up in Appalachia. This play has since become the company's prized possession.
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 (Nasdaq: EVEP) just acquired some Barnett properties from Talon Oil & Gas at roughly $11,000 per thousand cubic feet equivalent (mcfe) per day. EVEP says this production is primarily in the core, but most of Talon's leasehold, some of which it picked up from Denbury Resources (NYSE: DNR) in 2009, is west of Range's, in Parker County, Texas. Operators such as Carrizo Oil & Gas (Nasdaq: CRZO) categorize Parker as "Tier 1" rather than core. Wells in Tarrant County can pack twice the reserves seen in Parker, for example.
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.
