The Marcellus shale, a vast hydrocarbon-bearing formation that spans several states in the Northeast, is widely regarded as the most economical shale gas play in the country. According to Bentek Energy, an energy market analytics provider, the Marcellus can deliver an internal rate of return of about 20%, with a gas price of around $4 per MMBtu -- much higher than other leading shale gas plays such as the Haynesville, Fayetteville, and Barnett.
That means Marcellus operators can drill for shale gas when no one else is able to. EQT (NYSE:EQT), for instance, generates a 53% after-tax internal rate of return on its Marcellus wells, with gas prices above $4. And Cabot Oil & Gas (NYSE:COG), which boasted 15 of the top 20 producing wells in the Pennsylvania portion of the Marcellus last year, reckons the play's superior rates of return should allow it to generate $375 million in free cash flow next year.
Give the Marcellus' superior economics, operators in the play stand to benefit tremendously if the price of natural gas rises further. One major, low-cost operator worth a second look is Fort Worth-based Range Resources (NYSE:RRC). Let's see why it stands to benefit from its leading position in the Marcellus.
Range in the Marcellus
Range's value proposition is quite straightforward: It's a low-cost producer with a leading position in one of the country's most economical shale gas plays. Jeff Ventura, the company's chief executive, drove this point home during the company's first-quarter earnings conference call.
"We are blessed by having approximately 1 million net acres in the state of Pennsylvania, which includes a very significant position in the liquids-rich portion of the play," he said. "Our position is further differentiated by the fact in our area we have not only the Marcellus but we believe we have great stack pay potential in the Upper Devonian and Utica, plus where our play is located is also very important from a marketing point of view."
The company's strategy is also quite simple: It aims to grow production on a per-share basis while driving down unit costs. As evidenced by its first-quarter performance, it continues to deliver on this strategy, growing production by 34% year over year, while reducing unit costs by 10%.
For the rest of the year, Range expects its production to grow at a rate of 20% to 25%. In fact, management stated in the conference call that it sees line-of-sight growth in that range for years to come, thanks to the company's solid asset portfolio, which offers low reinvestment risk and superior projected rates of return.
Range displays many of the characteristics I look for in a natural gas producer. Not only does it command a sizable position in a core area of what is arguably the most economical shale gas play in the country, but it also continues to deliver on growth in both production and reserves, while consistently controlling costs.
Moreover, the economics of its asset portfolio, especially in the Marcellus "rich gas" portion, should allow the company to grow its cash flow at a faster rate each year than its projected production growth of 20% to 25% per year. All told, Range is an investment opportunity worthy of strong consideration right now, especially if you believe -- as I do -- that natural gas prices are heading much higher over the next three to five years.