One of the biggest issues facing producers operating in Pennsylvania's Marcellus Shale have been infrastructure limitations, which have resulted in wide differentials between regional prices and the NYMEX benchmark price. This means that Marcellus producers end up receiving a significantly lower price for their production, which eats into their margins and profits.
Cabot Oil & Gas (NYSE:COG), a leading Marcellus producer, said it received a price of about $0.60-$0.65 per Mcf lower than the NYMEX benchmark during the first quarter. While differentials are expected to compress significantly over the next few years as a wave of new infrastructure projects go into service, one company in particular has been extremely proactive in limiting their impact -- Range Resources (NYSE:RRC).
Range's big advantage
One of the main factors that sets Range apart from other Marcellus operators is the diversity of its gas marketing options. When the company first began amassing its position in Marcellus back in 2006, it sought not only high-quality acreage with strong economics, but also acreage located close to existing infrastructure.
Taking these two factors into consideration, Range ended up accumulating a concentrated position in southwestern Pennsylvania, where major nearby pipelines provide access to multiple markets and pricing points. As of the first quarter, the company had 9 different pricing indices on which its Marcellus gas production was priced, higher than any Marcellus producer I'm aware of.
This diversity of options reduces the risk associated with Marcellus basis volatility and helps ensure that Range's output can get to market at low cost. Going forward, Range expects to continue diversifying its marketing options. By 2017, it expects to sell its gas to approximately 20 different indexes, 15 of which are located outside the Appalachian Basin.
Other infrastructure options
In addition to a diverse and growing array of outlets for its dry gas production, Range will also have three major options to ship its natural gas liquids, or NGLs, production to both domestic and international markets once the Mariner East Project comes online later this year.
Mariner East, operated by Sunoco Logistics Partners (NYSE: SXL), is a pipeline project that will ship propane and ethane from MarkWest Energy Partners' (NYSE: MWE) processing facilities near the Marcellus shale to Sunoco's Marcus Hook facility near Philadelphia, where it will be processed, stored, and distributed to various domestic and foreign markets.
As the anchor shipper on the project with a firm transportation commitment of 40,000 barrels of ethane and propane per day, representing about two-thirds of total subscribed capacity, Range has a big advantage. Combined with its other two NGL outlets -- Mariner West and the ATEX pipeline -- Mariner East will boost Range's ethane sales revenue by 25% net of all transportation costs and processing fees.
The company also announced last month that it has signed five new transportation and marketing agreements to support future growth of its Marcellus operations. The contracts, which call for Range to supply both dry gas and NGLs for various projects, are firm, long-term commitments that give the company access to several premium markets at relatively low cost.
All these options will not only improve the economics of Range's core wet gas production in Marcellus, but will also provide the requisite marketing flexibility to allow it to comfortably grow its production at a rapid clip over the next several years.
Range's gas marketing team has done a phenomenal job in diversifying and growing its customer base to reduce Marcellus basis volatility and ensure that production gets to market at low cost. As new projects come online, basis differentials should compress further, boosting the company's margins and cash flow. And with such a diverse and growing array of marketing options, Range should be able to comfortably grow its Marcellus production at an annual rate of 20%-25% for many years to come.