Last week, the Energy Information Administration, or EIA, reported that Pennsylvania's natural gas production climbed an astounding 69% between 2011 and 2012. The state sits above the Marcellus Shale, and exploiting that formation has likely catapulted Pennsylvania into the ranks of the top five natural gas producing states. Let's take a closer look at this story, and what opportunities it may provide for investors.
Pennsylvania's transformation from gasless laggard to methane monster happened seemingly overnight. In 2008, the state produced less than 1 billion cubic feet per day (bcfd) of natural gas. That was the first year producers started drilling horizontal wells in meaningful numbers. The results are impressive:
In a mere four years, Pennsylvania's natural gas production has climbed from 1.0 bcfd to reach 6.1 bcfd in 2012. You can see how much of an impact shale drilling has had, given the rapid decline of non-horizontal wells in blue, and the corresponding rise of horizontal wells in brown.
Perhaps the more important take away from the graph above, is that this growth came at a time when drilling slowed overall. Between 2011 and 2012, there were about 750 fewer wells drilled, yet production increased 69% over that same period. Let's take a look at how this happened, and at two key opportunities that came out of it for investors.
Fewer rigs, but more gas?
There are two reasons that drilling rig counts dropped but production increased. The first is that because of a lack of pipeline capacity in the Marcellus, many rigs were drilled and never turned on. Capacity grew in 2012, and will grow even more in 2013, and again in 2014. This will allow producers to move more gas, which should drive the price up, much the way additional pipeline capacity in Texas has boosted the price of oil.
The second reason is that producers are much more efficient at drilling wells now. Improved techniques contribute to not only shorter drilling times, but higher production rates per well. The average horizontal well drilled in the Marcellus costs about $3 million-$4 million. Obviously, any company that improves drilling efficiency has the opportunity to cut costs as well.
Companies to consider
Given what we know about what is behind the growth in Pennsylvania, it makes sense to search for pipeline operators and efficient drillers in the Marcellus Shale. Here are four companies to get your research started:
- Kinder Morgan Energy Partners (NYSE: KMP) is the nation's leading natural gas transporter and naturally has a stake in the Marcellus. It is expanding its Tennessee Gas Pipeline system in several places, which should increase takeaway capacity by more than 8.0 million cubic feet per day by the end of November 2013.
- Enterprise Products Partners (NYSE:EPD) is bringing online one of the region's most anticipated pipeline projects, the ATEX Express. Chesapeake Energy (OTC:CHKA.Q) said in its last investor presentation that its wet gas production isn't going to increase until this 1,230-mile line from the Marcellus to the Gulf Coast starts up in the first quarter of 2014. It's expected to add takeaway capacity of 190 thousand barrels per day.
- Anadarko Petroleum (NYSE:APC) reported last year that it was able to drop well costs by around 40% in the Marcellus Shale. The company is one of the region's 10 top producers, and expects to increase volumes from 54 million barrels of oil equivalent per day in 2012, to about 80 million barrels of oil equivalent per day in 2013.
- Chesapeake Energy is the largest landholder in the Marcellus, but it is also the top producer. The company increased its dry gas production by 135% year over year in the fourth quarter of 2012, while simultaneously reducing its rig count.
The Marcellus Shale is producing more than 7.0 bcfd now, making it the top natural gas producing play in the country. If you believe in the future of American natural gas, this is as good a region to get in on the action as any.
Though production in the Marcellus is only expected to grow 30% this year, the fruition of several pipeline projects may have a serious impact on prices. If the price of natural gas climbs then the region's producers may enjoy their best fiscal year yet. All the more reason to think about taking another look at the gas-heavy portfolios of producers like Chesapeake Energy.