Petroleum Development Corp. (Nasdaq:PETD) is a small cap exploration and production company with a stable base of assets in the Rocky Mountains and potential upside with an emerging position in the Marcellus Shale. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)

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Operations
The company has total reserves of 753 billion cubic feet equivalent (Bcfe) as of December 31, 2008. The reserves are distributed among five areas:

  1. Piceance Basin - 373 Bcfe
  2. Wattenberg Field - 199 Bcfe
  3. NECO - 47 Bcfe
  4. Appalachia - 113 Bcfe
  5. Michigan - 20 Bcfe

Petroleum Development Corp is looking for company-wide production growth of 43.4 Bcfe in 2009, up 12% from 2008.

Piceance Basin
The company's main asset is its properties in the Piceance Basin in Colorado. The company produced 34.1 Mcfe per day here at the end of 2008. Petroleum Development Corp has 285 gross wells already producing, and believes there are an additional 377 locations left to drill.

One problem for Petroleum Development Corp is that it has 50% of its reserves in the Piceance Basin. The Piceance needs a fairly high price for natural gas of around $6.00 per Mcf to make it cost effective to develop the acreage there. The company is using a break-even price of $4.50 per Mcf in its investor presentation for the Piceance.

If the company was unable to hedge its production above this price level, it might have to cut back on its drilling program there. This may explain why the company is not running any rigs in the area currently. (Learn more about corporate hedging in Corporate Use of Derivatives For Hedging.)

Marcellus Shale
Petroleum Development Corp. has 53,000 acres under net lease in Pennsylvania and West Virginia, in the fairway of the Marcellus Shale. The company has drilled four vertical wells to date, and plans 5 more in 2009 before beginning its horizontal drilling program in 2010.

This is an early stage operation in the Marcellus Shale, and although it provides some good upside to a shareholder, there are other exploration and production companies with more advanced development of its acreage in the Marcellus Shale. Range Resources (NYSE:RRC), for example, has more than a million acres and has already drilled hundreds of wells.

Another company with a large prospective acreage position in the Marcellus Shale is Ultra Petroleum (NYSE:UPL). Although this acreage is also at an early stage of development, Ultra Petroleum has the benefit of its low cost and high cash flow properties in the Pinedale to see it through the development of the Marcellus Shale.

Petroleum Development Corp is rebalancing its capitalization structure and issued equity in August 2009, raising $49 million after expenses. The company will use the proceeds to pay down part of its credit line.

Petroleum Development Corp might want to consider a joint venture with a larger company to expedite and support development of its acreage in the Marcellus. Rex Energy (NYSE:REXX), another small cap company active in this area, recently teamed up with Williams Co. to develop its Marcellus Shale properties.

The Bottom Line
Petroleum Development Corp has acreage in one of the hottest shale plays in North America, but is farther behind its peers in developing this acreage. The company might benefit from a joint venture with a larger partner here as it begins its horizontal drilling program in 2010.

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