Strongly Positioned in Marcellus to Map Long Term Production Growth

Wednesday 8 February 2012, Amsterdam

Strongly Positioned in Marcellus to Map Long Term Production Growth

The Marcellus shale is one of the most progressive unconventional gas shales in the US. The shale is located in some of the most prosperous states of the US, close to the major natural gas consuming markets in the US, which provides it with an edge over other developing gas plays in the country. Furthermore, it is estimated that there is around 4,359tcf of natural gas under the Marcellus shale play, and from this, around 262tcf of natural gas is recoverable. As a result, several oil and gas companies are undertaking investments on a large scale in this shale in order to drive their future production growth. The table below details the key characteristics of the Marcellus shale.

Table: Marcellus Shale, Key Characteristics, 2011

Depth (feet) 4,000–8,500
Thickness (feet) 50–200
Total Organic Content (TOC) (%) 3–12
Porosity 5.5–7.5
Pressure Gradient (psi/ft) 0.4–0.7
Original Gas in Place (OGIP) (bcf/section) 20–150
Anticipated Recovery Factor 20%–40%
Well Cost ($m) 5
Gross EUR per Well 5.4
Finding and Development Cost ($/Mcfe) 0.8–1.4

Range Resources is one of the major companies operating in this shale. The company has been continuously developing and capturing Marcellus Shale potential since 2004. The company reported large investments in last three years to accelerate its Marcellus shale operations. In 2010, the company drilled 113.6 net development wells and 3.9 net exploratory wells in the Marcellus Shale. Furthermore, the company reported around 422 proven drilling locations in the shale in 2010. The company’s production from the shale increased by 166% in 2010 compared to 2009 primarily due to aggressive development activities. The company’s production from this shale in 2008, 2009 and 2010 was 5,215MMcfe, 20,969MMcfe and 55,802MMcfe, respectively. The contribution of this shale in the Range Resources’ total production increased from around 3.7% in 2008 to 30.9% in 2010, demonstrating the increasing importance of the shale in the company’s production growth. Additionally, the company planned to drill 196 wells in the shale in 2011 and allocated 86% of its 2011 capex for the development of this shale. The company estimates a resource potential of 22-32tcfe. Range Resources expects the operations in the Marcellus Shale to become cash-flow positive and self-funding by 2013. According to GlobalData estimates, the company’s production from the shale is expected to increase from 9.3 MMboe in 2010 to 40.1 MMboe in 2015, increasing at a CAGR of 33.9% during 2010–2015. It is also estimated that the contribution of the shale in the company’s total production is expected to increase from around 30.9% in 2010 to around 58.3% in 2015. The figure below shows the production forecast in the Marcellus shale and its contribution to the total production during 2011–2015.

See figure:Range Resources Corporation, Marcellus Shale, Production Forecast and its Contribution in Total Production, 2011–2015

Apart from the Range Resources, there are several other oil and gas companies operating in this shale. The figure below shows the comparative position of Range Resources against other companies operating in this area. The several parameters considered in this comparative analysis are net acreage, proved oil and gas reserves, total production, number of operated rigs, cost per well, and Estimated Ultimate Recovery (EUR) per well. The various companies along with Range Resources included in this analysis are Chesapeake Energy Corporation, CONSOL Energy Inc., National Fuel Gas Company, Exxon Mobil Corporation, Chevron Corporation, Statoil ASA, Talisman Energy Inc. and others.

According to the analysis, Range Resources outperforms its peers in most of the parameters. In 2010, the company owned a net acreage of around 790,000 acres in the shale, which is the second highest after Chesapeake. Other major players in the Marcellus shale in terms of net acreage were CONSOL, National Fuel Gas Company, Exxon Mobil, Chevron and Statoil ASA. In 2010, Range Resources had a net production of 152.9MMcfe per day (/d), which was higher than other companies such as Chesapeake, Equitable and CONSOL. Range had total proved reserves of 316.7 MMboe which was higher than Southwestern (6.3 MMboe), National Fuel Gas Company (33.5 MMboe), Consol (143.2 MMboe) and Chesapeake (201.1 MMboe).

In terms of operated rigs, the company lagged behind Chesapeake and Statoil ASA. The total number of operated rigs of Statoil ASA, Chesapeake and Range Resources in 2010 was 36, 29 and 12. Range Resources has one of the lowest costs in the peer group. The total costs per well in Shale were around $4m/well which was lower than most of its peers such as Exco, Penn Virginia, the Williams Companies and Rex Energy. Range Resources, however, lagged behind its peers in terms EUR per well. Range Resources’ EUR per well in 2010 was 5.7bcfe/well which was lower than other companies including Exco (5.8bcfe/well), Ultra Petroleum (6.1bcfe/well), CONSOL (6.4bcfe/well), Equitable Resources (7.3bcfe/well) and Cabot Oil and Gas (10.0bcfe/well). This implies that the per well economics is less favorable compared to its peers. However, the company outperforms the peer group in most of the parameters, establishing itself as one of the strongest players in the Marcellus shale gas play.

The company’s strong position in the Marcellus shale and the huge potential of the area indicate that the production from Marcellus can help the company to support its long term production growth. However, the shale is still in its development phase and it requires sufficient funding in order to capture its complete potential. The company is planning to generate this funding through the sale of its non-core-assets. In 2010, the company sold its tight gas sand properties in Ohio for a total consideration of $323m. Furthermore, in February 2011, the company announced the sale of its Barnett properties for a consideration of $900m in order to fund the operations in the Marcellus shale. The company expects its Marcellus acreage to be self sufficient by 2013. This shows that Range is aggressively developing its Marcellus acreage in order to support its production growth in the coming years.