Pennsylvania's Marcellus shale has rapidly emerged as the most economical and fastest-growing shale gas play in the country. With many Marcellus producers able to turn strong profits even at $4 per Mcf natural gas, drilling activity in the play has grown robustly, fueling a near doubling of gas production from 2012 to 2013.
And with activity expected to accelerate as new and expanded infrastructure projects are brought online, Marcellus production is expected to keep growing at a rapid clip for at least the next several years. This should drive continued growth for Marcellus gas producer Range Resources (NYSE:RRC), which has one of the best acreage positions in the play's sweet spot and more than a decade's worth of drilling opportunities.
High-quality acreage and strong economics
Range boasts approximately 1 million net acres in the Marcellus, with roughly 530,000 net acres in the southern portion of the play. This part of the play is significantly more profitable, because it has much higher volumes of natural gas liquids and condensate than the northern portion.
Range's acreage in the southern part of the play consists of three zones -- super-rich, wet gas, and dry gas, all of which are generating exceptional returns for the company. Thanks to strong EURs and relatively low well costs ranging from $6.1 million to $6.8 million per well, Range generates an internal rate of return of about 105% from its wells in southwestern Pennsylvania at a wellhead gas price of $4.00 per MMBtu, representing some of the strongest full-cycle economics in the entire play.
By comparison, Ultra Petroleum's (NASDAQ:UPL) Marcellus economics are considerably worse, with the company's returns in the range of 25% to 50%. Cabot Oil & Gas (NYSE:COG) and Chesapeake Energy (NYSE:CHK) are two of the only companies generating stronger returns than Range, with Chesapeake's most profitable Marcellus wells earning a 117% rate of return at a gas price of $4 per MMBtu and Cabot's wells generating returns in excess of 100% at a gas price of just $3.00 per MMBtu.
Massive inventory and resource potential
In addition to the strong economics of its Marcellus drilling program, Range has a truly massive inventory of at least 7,000 net undrilled well locations in the southern portion of the Marcellus. Considering that Range has only about 520 producing wells in the location, this represents more than a decade's worth of drilling opportunities at current activity levels.
Range's reserves also continue to grow at double-digit rates, with the company boosting its year-end 2013 proven reserves by 26% to 8.2 trillion cubic feet equivalent, or Tcfe. But that's not all. Range's resource potential in the Marcellus could be as much as 8 to 10 times its proven reserves, which gives it a phenomenal opportunity to grow its proven reserves at double-digit rates over the next several years.
Thanks to successful technical improvements across its acreage, the company has already moved 6.4 Tcfe of unproven resources to proven reserves over the past four years, representing an impressive 27% compound annual growth rate in proven reserves over the period. Given the strong likelihood of continued technical improvements, Range should be able to convert much more of its unproven resources into proven reserves at an extremely low cost.
Several years of double-digit growth
Thanks to its concentrated acreage position in the highly economical liquids-rich southern portion of the Marcellus, Range should continue to grow production at double-digit rates over the next several years, while booking additional reserves at extremely low cost.
Given the company's strong track record of execution, its phenomenal gas marketing team, and its massive inventory of highly economical drilling opportunities in the Marcellus' sweet spot, it should be able to deliver strong growth in production, earnings, and cash flow for many years to come.