EQT Corporation (NYSE:EQT) is looking for 32% production growth in 2012, as the company makes a bet on the successful development of the Marcellus Shale next year. The company also plans to help fund this development through an initial public offering of the company's intrastate pipeline business. (To know more about oil and gas, read Oil And Gas Industry Primer.)
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2012 Capital Budget
EQT Corporation has budgeted $1.6 billion for capital expenditures in 2012, with 75% or $1.2 billion allocated to EQT Production, the upstream segment of the company. EQT Corporation estimates that production in 2012 will range between 255 and 260 Bcfe, a 32% increase over expected 2011 production of 195 Bcfe.
EQT Corporation will put approximately 80% of the company's upstream budget into the development of the Marcellus Shale in 2012. The company has 530,000 net acres in Pennsylvania and West Virginia that is prospective for this formation and plans to drill 132 wells here during the year.
EQT Corporation reported 2.9 Tcfe of proved reserves in the Marcellus Shale at the end of 2010, and estimates the company's probable and possible reserves at 9.3 Tcfe. The company also estimates that Marcellus Shale wells will provide the company a 41% after tax return. The company uses an average well cost of $6.7 million, an estimated ultimate recovery of 7.3 Bcfe and a $4.50 NYMEX price for natural gas.
EQT Corporation is planning on using a different hydraulic fracturing technique on many of its Marcellus Shale wells in 2012. Although this new design will increase drilling and completion costs, the company feels that this additional cost will lead to more productive wells with better returns.
Range Resources (NYSE:RRC) is also active in the Marcellus Shale and reports that the company's internal rate of return ranges from 79 to 134%. The higher return is due to the presence of natural gas liquids in the company's production stream.
National Fuel Gas (NYSE:NFG) has 745,000 net acres prospective for the Marcellus Shale and plans to spend between $740 million and $820 million in capital here in 2012.
EQT Corporation will also drill an additional 120 wells into the Huron Shale, a lesser known formation that is also present on its properties in the Appalachian Basin.
EQT Corporation reported 1.5 Tcfe of proved reserves in the Huron Shale at the end of 2010, and estimates the company's probable and possible reserves at 5.9 Tcfe. Huron Shale wells earn the company a 15% after tax return. Other companies that have exposure to the Huron Shale include CONSOL Energy (NYSE:CNX), which has 480,000 net acres in Kentucky and Virginia.
Initial Public Offering
EQT Corporation is planning to conduct an initial public offering of the company's intrastate pipeline businesses in 2012. The new company would be structured as a master limited partnership (MLP) and EQT Corporation would continue to own a substantial portion of the common units and will also own the General Partner of the new MLP. EQT Corporation plans to use the proceeds of the offering to fund the development of the Marcellus Shale.
The Bottom Line
EQT Corporation is betting that the Marcellus Shale will help the company generate production growth in 2012 and beyond. The company is also accelerating development here in 2012, through an initial public offering of the company's pipeline unit. (For additional reading, check out A Guide To Investing In Oil Markets.)
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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.