The Marcellus Shale continued to attract capital from the exploration and production industry in 2011, despite the industry shift towards the development of crude oil plays. Here's a look at three small capitalization companies that were active in this play in 2011 and plan to continue working here next year.
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Small-Cap Players
Magnum Hunter Resources (NYSE:MHR) has approximately 58,000 net acres of Marcellus Shale exposure spread across the Appalachian Basin. The company has assembled this position over the last few years through various acquisitions, and recently announced a joint venture with Stone Energy (NYSE:SGY) on a small portion of its Marcellus Shale leasehold. (For related reading, see What Determines Oil Prices?)

Magnum Hunter Resources favors the Marcellus Shale over other areas, because of its close proximity to major population centers in the United States. The company also likes the play because it has one of the lowest breakeven price levels in the onshore United States.

Magnum Hunter Resources has put 10 gross Marcellus Shale wells onto production and estimates that it has 306 gross drilling locations into this formation. In 2012, Magnum Hunter Resources plans to put 25% of its $200 million capital budget towards the development of the Marcellus Shale. The company will spend an additional 25% on infrastructure to help service this area.

Rex Energy (NYSE:REXX) is active in the Marcellus Shale on both an operated and non operated basis. In Butler County, Pennsylvania, Rex Energy operates a 44,500 net acre position in a joint venture with Sumitomo Corporation. The company also has a 3,000 acre operated position outside of the joint venture.

Rex Energy is building additional infrastructure to process and transport increased production from Butler County. The company expects to open a new cryogenic facility with capacity of 50 million cubic feet per day in May 2012.

Rex Energy is also involved on a non-operated basis in a joint venture with Williams (NYSE:WMB) on 43,000 gross acres in three other counties in Pennsylvania. Sumitomo Corporation also has a small interest in this joint venture.

Rex Energy plans to continue this development in 2012 and has announced a preliminary capital budget between $175 million and $190 million. This level of spending is expected to generate production growth between 70 and 80% for the company. (For related reading, see Which Is A Better Measure For Capital Budgeting, IRR or NPV?)

Gastar Exploration (NYSE:GST) has approximately 74,000 net acres with Marcellus Shale exposure with the acreage spread across Pennsylvania and West Virginia.

The company entered into a joint venture with Atinum Partners Co., Ltd., a South Korean company, to help fund development of a portion of this acreage. The agreement calls for the joint venture to drill 12 horizontal wells in 2011 and 24 horizontal wells in both 2012 and 2013.

The Bottom Line
The Marcellus Shale has been one of the exceptions to the industry flight away from natural gas development and investors should expect to see further investment here in 2012. Investors that like to dabble in small cap stocks should examine these three oil and gas operators. (For related reading, see An Introduction To Small Cap Stocks.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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