National Fuel Gas (NYSE:NFG) is counting on the company's large position in the Marcellus Shale to power growth over the next four years, turning the company into a growth story in the exploration and production sector.

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Marcellus Shale
National Fuel Gas has 745,000 net acres with exposure to the Marcellus Shale in Pennsylvania and New York. The company estimates that its resource potential on this acreage is between 8 and 15 Tcfe.

Capital Expenditures
National Fuel Gas plans to rapidly increase capital spending over the next four years to develop this position in the Marcellus Shale. The company spent $332 million here in 2010, or 83% of its total capital budget. In 2014, National Fuel Gas plans to spend between $900 million and $1.1 billion in the Marcellus Shale. This level of spending would represent nearly the entire capital budget for the company.

National Fuel Gas plans to increase its rig count to 10 here by 2014, including three in a joint venture with EOG Resources (NYSE:EOG). The company will drill 156 net wells in 2014.

Production
National Fuel Gas expects the company's large investment in the Marcellus shale to rapidly increase production through 2014. The company reported total annual production of 49.7 Bcfe in 2010 and expects this to rise to a range between 160 Bcfe and 200 Bcfe in 2014. This would represent 262% growth using the midpoint of 2014 production.

Western Development Area
National Fuel Gas separates its Marcellus Shale acreage into Western and Eastern Development areas. The Western Development Area has superior economics because the company owns the mineral rights here and doesn't have to pay a royalty. Wells here will earn a 16% return even using the low estimated ultimate return (EUR) scenario of 3 Bcf per well. The return moves to 49% using and EUR of 5 Bcf per well.

Eastern Development Area
Although National Fuel Gas has superior economics in the Western Development Area, the company's initial focus is on the Eastern Development Area. National Fuel Gas plans full scale development of its Tioga and Lycoming County leasehold over the next year, with 42 wells in these two counties in fiscal 2012, as well as two more in Potter County.

National Fuel Gas will restrict its activity in the Western Development Area mostly to evaluation of acreage and limited drilling in derisked areas.

Other Appalachian Plays
National Fuel Gas also has some other emerging plays on its Appalachian Basin acreage, including the Geneseo and Utica Shale.

National Fuel Gas has 300,000 net acres prospective for the Geneseo Shale and drilled a horizontal well in Potter County with a peak rate of 2.9 million cubic feet per day. Another operator working the Geneseo Shale is Royal Dutch Shell (NYSE:RDS), which got involved in the play through the purchase of East Resources.

National Fuel Gas is at a much earlier stage of development in the Utica Shale and has not disclosed any information on acreage or resource potential here. The company plans to do a vertical well here in September 2011. Chesapeake Energy (NYSE:CHK) is a leader in the development of the Utica Shale and has a majority of all the drilling permits issued in Ohio.

The Bottom Line
National Fuel Gas might be the largest yet least known operator in the Marcellus Shale and is a more conservative way to play the growth in the development of this massive resource play. (For additional information, see Unearth Profits In Oil Exploration And Production.)

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