Who’s a Member of the Marcellus “1 Bcf/d” Club?

At the end of an article about EQT, Seeking Alpha blogger and energy analyst Richard Zeits includes a short list of companies who either already belong, or soon will join, the “1 billion cubic feet per day club” of Marcellus Shale gas production.

So far only one driller has achieved 1 Bcf/d of Marcellus production (quick, which one is it?). EQT will likely join the club in 2014. Who else is on the short list to join them? Read on to find out…

Several other companies have been indicating equally impressive increases in their Marcellus volumes in the next few years:

• Cabot Oil & Gas (COG) announced in December that its operated Marcellus production surpassed the 1 Bcf/d level (gross), which is substantially above the company’s 2012 exit rate expectation communicated during the Q3 2012 conference call. Cabot is currently guiding to another 35%-50% company-wide year-on-year production increase in 2013, with the vast majority of the volumes coming from the Susquehanna dry gas area. It will not be surprising to see an upward revision to the guidance given the impressive production results in Q4 and progress in infrastructure de-bottlenecking.
• Southwestern Energy (SWN) may achieve a 2013 operated production exit rate from its Marcellus properties in the 550-600 MMcf/d range, up significantly from the estimated ~300-325 MMcf/d exit rate for 2012; volumes may ramp up to over 1 Bcf/d by 2017 (all volume estimates are by the author based on research of the company’s operating results and forecasts).
• Noble Energy (NBL)/Consol Energy (CNX) JV production has more than doubled in 2012 to approximately 280 MMcfe/d and is expected to grow at a 80% year-on-year rate in 2013. The rapid ramp-up rate is expected to be sustained over the next five-year period, with a 55% CAGR projected currently (according to Noble Energy). During the next three years, growth will be driven mostly by wet gas drilling.
• Several more operators will soon be providing their 2013 guidance. Range Resources (RRC) has not released its official 2013 volumes forecast yet but is likely to guide to another year of solid growth, given the company’s very strong exposure to the highly economic rich and super-rich gas sweet spots.

Lest we leave the wrong impression, the Marcellus doesn’t come up roses for every driller in every area. Some drillers are scaling back operations largely because of the low commodity price of natural gas:

Not all areas are equally successful in the Marcellus. In fact, the majority of the play’s acreage is uneconomic in today’s (and, likely, tomorrow’s) price environment and are no different from many other marginal shales that may see little development capital.

Several operators have substantially reduced operating activity in the Marcellus’s less productive areas:

• Talisman Energy (TLM), who has ~200,000 dry gas acres in Tioga, Bradford and Susquehanna Counties, has reduced its Marcellus capital budget from over $1,100 million in 2011 to less than $300 million in 2013 and is currently running just one rig (which, in fact, may be sufficient to avoid steep declines in its Marcellus volumes). Talisman estimates it needs $3.50-$4.00/Mcf just to break even on its drilling program.
• Ultra Petroleum (UPL) has seen a significant slowdown of drilling activity on its acreage (one part of which is operated by Anadarko and the other by Shell).
• Anadarko Petroleum (APC), with 260,000 net acres in the Marcellus, has been able to achieve very tangible improvements in its drilling economics: average well in its high-graded inventory is expected to deliver a 8 Bcf EUR at a $7 million cost. Still, Anadarko estimates it needs $3.50/MMBtu NYMEX to generate 20%+ before-tax rate of return, which puts its Marcellus drilling program essentially at the bottom of its North American opportunity set.
• EXCO Resources (XCO), with 135,000 net acres in Northeastern and Central PA parts of the play, has reduced its operated rig count in the Marcellus from five rigs in 2011 to just one rig in Q3 2012.
• The majors, including Exxon (XOM) and Chevron (CVX), have been running very conservative rig counts in the Marcellus relative to their massive acreage positions and may let some of their acreage expire undrilled.

However, the massive volumes growth from the sweet spots should be more than sufficient to offset the decline in activity in the less productive areas.

*Seeking Alpha/Richard Zeits (Jan 28, 2013) – EQT Corp. Operating Analysis: Marcellus Shale Production Growth To Continue Unabated In 2013