Marcellus Siren Song Plays On

By Eric Fox | May 12, 2009 AAA

First-quarter earnings reports from exploration and production companies indicate operators are still counting on Marcellus Shale development to grow production. As a result, they are directing capital toward this underdeveloped shale play, as the economics remain attractive despite the fall in natural gas prices.

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The Marcellus Shale is located in the Northeastern United States, with most of the current industry activity centered in Pennsylvania. The shale also extends into neighboring states New York and West Virginia.

Capital Allocations To The Marcellus Could Rise
Anadarko Petroleum
(NYSE:APC) is in a joint venture with Chesapeake Energy (NYSE:CHK) in the Marcellus Shale. Anadarko just completed its second horizontal well and has five others in various states of completion. Al Walker, CEO, said the company could shift more capital toward the Marcellus if drilling results justify it. "I think if that drilling through the course of this year continues on the path that we see it at today...don't be surprised to see us add to our capital allocation to the Marcellus."

Drilling Costs Millions
It is important for an operator to become more proficient in drilling in the Marcellus, as this will lead to less drilling time and therefore less cost. EQT Corp. (NYSE:EQT) has drilled 31 wells in the play to date, with 11 of them horizontal. Two horizontal wells drilled in the Q1 cost $5.5 million each. During the earnings conference call, the company said that long term it was targeting a cost of between $3.5 million and $4 million per well.

Major Marcellus Players
EXCO Resources (NYSE:XCO) is planning on higher investments in the shale. The company has 360,000 acres under net lease and is currently completing two horizontal wells. It is taking it slow in developing its properties and plans five wells in 2009. The company will then decide on a development plan based on these well results.

Rex Energy (Nasdaq: REXX) is a micro-cap company that is basically a pure play on the Marcellus Shale. The company has other properties located in the Illinois Basin, but its main focus is on developing its Marcellus properties. The company just finished drilling its first horizontal well into the shale and will start hydraulic fracturing of the well, with results to be reported in time for the Q2 conference call.

One company that is starting to develop acreage in the Marcellus that might come as a surprise is Ultra Petroleum (NYSE:UPL), which is known as the dominant player in the Pinedale Anticline in Wyoming. Although the company has more than enough drilling locations and acreage there, it now has accumulated 171,000 net acres in the Marcellus and is completing two recently drilled horizontal wells.

During the Ultra's earnings call, almost every analyst question pertained to the Marcellus, rather than the company's core properties in the Pinedale. This is indicative of the attention the play is getting.

Seen As A Source Of Future Growth
The Marcellus Shale seems almost immune to the slowdown in drilling activity that is hitting the energy sector, as operators continue to commit capital to what is seen as a huge source of future growth in production and reserves of natural gas.

To learn more, read Fueling Futures In The Energy Market and our Oil And Gas Industry Primer.

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