November 3, 2016 • Vol. 6, No. 4docFinder alert
docFinder alert

Marcellus vs. Louisiana Natural Gas Plays:

Some of the reasons behind Range's acquisition of Memorial Resource Development


Marcellus offers higher EURs, lower costs

Range Resources Corp

October 25, 2016

Full Presentation


Louisiana returns better on higher regional prices

Range Resources Corp

October 25, 2016

Full Presentation

The Marcellus Shale has become the largest and most prolific natural gas play in the United States since it overtook the Haynesville Shale in Louisiana in 2012. Despite plunging US natural gas prices, Marcellus production has continued to climb from about 1.8 MMboe/d in mid-2012 to 3 .0 MMboe/d in July 2016, while Haynesville production plunged to about 1.0 MMboe/d. That’s why we were surprised this year when Range Resources, a first-mover in the Appalachia play, announced the $4.4 billion acquisition of Northern Louisiana producer Memorial Resource Development. To investigate the reasons for the transaction, we turned to docFinder, the most comprehensive and accessible source of oil and gas financial and operational information. What we learned was that while the Marcellus is still a premier play with tremendous long term potential, new drilling technologies have dramatically improved well performance and returns in Louisiana, which may elevate it once again to premier play status.

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The latest corporate presentation by Range, which closed the Memorial acquisition just before the end of the third quarter, contains a compelling comparison. Range’s southwest Marcellus position is a very low cost play, as the company has slashed lease operating expenses by 54% since early 2014 to a current $0.16/Mcfe. Well costs have also fallen to approximately $800,000 per 1,000 lateral feet. But returns have been greatly reduced by a shortage of takeaway capacity out of the region, resulting in Marcellus realizations that have been about $0.50/Mcfe below the already low NYMEX prices. The result is internal rates of return at current gas prices of 35-55% at current strip prices. In contrast, gas output in North Louisiana has been selling at near NYMEX prices, and transportation costs to the prime Gulf Coast markets are much lower. But the major change from 2012 is that new horizontal drilling techniques have made wells in the region much more productive. Range reports an EUR (Economic Ultimate Recovery) per 1,000 lateral feet of 2.3 Bcfe, near the 2.4-3.0 Bcfe range of Marcellus wells. Although drilling costs are higher at a current $1,160,000 per 1,000 lateral feet, the net effect is a71% internal rate of return for new North Louisiana wells at current strip prices. At a time of capital rationing by E&P companies, wells earning previously acceptable rates of returns, like in the Marcellus, are not being drilled in favor of superior earning projects.

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featured.slides from docFinder

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Reports "monster" Haynesville wells

October 20, 2016


Firm proclaims Haynesville transformation

September 22, 2016

Rice Energy

Takeaway capacity fuels high return Utica drilling

September 6, 2016

EQT Corp

Exploiting Appalachia multi-zone potential

October 5, 2016

Chesapeake Energy is a major Marcellus producer, where it generates 1.95 Bcf/d or 20% of its total output. But in 2016 the company has no drilling rigs in the play. In contrast, it is running three in the Haynesville Shale, where it announced in August that it would double the number of planned wells this year. The reason is new drilling techniques that have generated a 250% increase in 90 day production and a rate of return that has increased from 3% in 2014 to 47% in 2016.

EXCO Resources has been financially challenged since the plunge in commodity prices. Although it still has one of the highest debt to total capital ratios in the industry, the company has been successfully restructuring its debt with creditors because of dramatically improved results in its core Haynesville/Bossier shale positions. Although EXCO also produces from the Marcellus, it is allocating all of its limited investment dollars to North Louisiana and East Texas. Its efforts include a successful re-fracking program that has generated an extra 2.0 Bcf in production by applying new techniques to previously drilled wells. It is generating an average 27% rate of return, but expects that to improve when it renegotiates current midstream contracts.

Rice Energy’s recent results demonstrate the impact of adequate takeaway capacity on natural gas returns. While Rice is a major Marcellus producer, its midstream operations have resulted in a major increase in the availability of pipelines to export from the dry gas Utica Shale in Ohio. Rice said it is now generating a 95% rate of return from the region, where it recently doubled its rig count from one to two. Like EQT, Rice announced a major acquisition, the $2.4 billion purchase of Vantage Energy that doubled its dry gas acreage in Pennsylvania. Interestingly, the purchase also provided 37,000 net acres in the Barnett Shale, another former premier play dimmed by the emergence of Appalachia.

Appalachia-focused EQT Corp., the fourth largest US natural gas producer, has recently demonstrated its confidence in the long-term potential of the region by spending $1.1 billion in the last five months to expand its Marcellus position. While it awaits the completion of major pipeline projects to boost differentials, it has been generating attractive returns by targeting the Upper Devonian formation that overlays the Marcellus in its core region in southwest Pennsylvania and northern West Virginia. It added 30 Upper Devonian wells, along with 33 Marcellus wells, to its 2016 drilling program after gas prices increased, and expects the shallower wells to record a 27% rate of return for a 7,500 foot lateral at $2.50/Mcfe gas. Obviously EQT hasn’t move out of the Appalachia but why wouldn’t it?


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