Despite low gas prices over much of last year, the Marcellus shale -- a vast formation that extends from southern New York to West Virginia and spans most of Pennsylvania, the eastern part of Ohio, and parts of Maryland, Virginia, and Tennessee -- was one of the only gassy plays in the country that didn't see a sharp drop-off in drilling activity.
And more recently, the play has generated a great deal of interest, with a handful of transactions occurring over just the past few months. For instance, Southwestern Energy (NYSE:SWN) more than doubled its net acreage in the play, taking advantage of distressed seller Chesapeake Energy's (OTC:CHKA.Q) need to divest non-core assets to raise much-needed cash.
Shortly thereafter, Chesapeake offloaded another asset package, this time to Pittsburgh-based EQT (NYSE:EQT). The $113 million transaction was for 99,000 net acres in southwestern Pennsylvania and 10 horizontal Marcellus wells in Washington County, Pa.
Natural gas prices -- though they've risen appreciably over the past couple of months -- are still very low by historical standards. So what's the reason behind the recent flurry of acquisition activity in the play?
Low costs of production
The Marcellus' popularity is due largely to its superior economics: It boasts some of the lowest all-in production costs of any U.S. shale gas play, as well as a relatively high proportion of natural gas liquids relative to other gassy plays.
According to Bentek Energy, an energy market analytics provider, the Marcellus can deliver a sufficient internal rate of return, or IRR, of about 20% with a gas price of roughly $4 per MMBtu. By comparison, other natural gas-supported plays such as the Haynesville, Fayetteville, and Barnett shales require a gas price of around $5 per MMBtu to deliver the same IRR.
Another major reason the play is so popular is its ideal location. The Northeast hosts some of the largest gas-consuming cities in the country, including New York City, Boston, and Philadelphia, giving Marcellus producers a convenient outlet for their production. Jeff Ventura, CEO of Range Resources (NYSE:RRC), one of the most active drillers in the play, explained:
"Gas from the Marcellus will not only supply in Northeast United Sates, but gas from the Marcellus will move into the Midwest and Southeast markets. It's also strategically located relative to existing pipeline infrastructure as well as the export facilities in harbor in the Philadelphia area."
Going forward, production growth in the Marcellus is likely to outpace most other shale gas plays in the country. Bentek Energy projects that production volumes in the Northeast region of the country will increase to more than 10 billion cubic feet per day this year and rise to 17 bcf/d in 2017, with the Marcellus and Utica shales expected to account for the vast majority of this growth.
A low-cost Marcellus producer to consider
Some of the lowest-cost producers in the play include the aforementioned Range Resources, Southwestern Energy, and EQT, as well as Ultra Petroleum (OTC:UPL), which commands approximately 260,000 net acres in the play. The company boasted one of the lowest all-in costs per Mcfe in the entire industry last year and reckons that some of its deeper Marcellus wells can generate an IRR of 82% at a gas price of $4 per Mcf at the wellhead.
If gas prices rise significantly over the next few years -- as I have argued they probably will -- Ultra's Pinedale Field and Marcellus assets should generate some really strong returns, which is sure to boost the company's earnings and its stock price. This is one company that's definitely worth a second look.