The development of the Marcellus Shale is only just starting as this play offers superior returns, and is large enough that almost every operator can get a piece. The industry can also choose from a number of other oil and gas shale formations present in the same area. (For additional reading, check out A Guide To Investing In Oil Markets.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Great Economics
Although many operators are rushing to develop crude oil plays in pursuit of higher returns, some wet gas plays have rates of return that are competitive with and even better than returns generated from the development of crude oil plays.

The Goldman Sachs Group (NYSE:GS) estimates that the wells drilled into the Marcellus Shale in southwestern Pennsylvania have some of the lowest breakeven costs in the domestic onshore space. The company estimates that a NYMEX natural gas price of $2.00 per one million British thermal units (MMBtu) is required to earn a 12% internal rate of return.

Range Resources (NYSE:RRC) is one of the largest players here, and estimates that a price of $6.00 per MMBtu would boost that return to 134% on an average well. (Find out how to invest and protect your investments in this slippery sector. For more, see What Determines Oil Prices?)

Other Shale Formations
While the Marcellus Shale has garnered the most publicity in the areas where the industry is drilling, this play is not the only shale formation present in Pennsylvania and West Virginia. Much of the Marcellus acreage also contains several Upper Devonian shale formations including the Rhinestreet, Middlesex, Genessee and Burkett plays.

The industry has started testing this acreage and reported some positive results. Rex Energy (Nasdaq:REXX) recently drilled and completed an Upper Devonian Shale well in Pennsylvania, and reported an average production rate of 3 million cubic feet of natural gas per day during the first five days of production. The company was encouraged enough by the results that it has added additional Upper Devonian wells into its 2012 capital program.

Range Resources has also drilled two test wells into the Upper Devonian shale and plans an additional test well in 2012. The company estimates that the Upper Devonian Shale on its properties contains between 10 and 14 trillion cubic feet equivalent of potential resources.

Although most investors know that the Marcellus Shale is present on a large area and spreads across parts of at least six states, the true scale of this resource play is sometimes not fully realized.

The immensity of this play can be better understood by looking at the long-term development plans of some of the largest operator's active in the Marcellus Shale. Chesapeake Energy (NYSE:CHK) and Statoil ASA (NYSE:STO) are involved in a joint venture to develop the Marcellus Shale, and estimate that the joint venture may drill up to 17,000 wells into the Marcellus Shale over the next 20 years.

One industry consultant estimates that pipeline capacity will increase to 8.5 billion cubic feet (Mcf) per day by 2013, up from current levels of 3.5 Mcf per day. Total dry gas production from the Northeastern United States is expected to reach 12 Mcf per day by 2016.

The Bottom Line
The Marcellus Shale is now a household word in millions of homes across the Northeastern United States as domestic oil and gas drilling continues to boom in this region. This development is likely to continue for at least a generation due to the economics of the play, and the large footprint of this and other oil and gas formations. (To know more about oil and gas, read Oil And Gas Industry Primer.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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

Related Articles
  1. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  2. Mutual Funds & ETFs

    Top 3 Commodities Mutual Funds

    Get information about some of the most popular and best-performing mutual funds that are focused on commodity-related investments.
  3. Stock Analysis

    What Seagate Gains by Acquiring Dot Hill Systems

    Examine the Seagate acquisition of Dot Hill Systems, and learn what Seagate is looking to gain by acquiring Dot Hill's software technology.
  4. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  5. Stock Analysis

    The Biggest Oil Producers in Asia

    Learn which Asian countries deliver the most crude oil to market, and discover what companies are the biggest producers in each country.
  6. Stock Analysis

    The 5 Biggest Russian Oil Companies

    Discover the top Russian oil companies by production volume and find out more about their domestic and international business operations.
  7. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  8. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  9. Stock Analysis

    3 Solar Stocks to Add to Your Portfolio

    Understand the growth and challenges of the renewable energy market and its success in 2015. Learn about the top three energy stocks to add to a portfolio.
  10. Investing News

    Glencore Shares Surge in Hong Kong

    Shares of Glencore International, a leading multinational commodities and mining company, jumped by around 15% on London Stock Exchange, after the shares had gained about 71% earlier on the Hong ...
  1. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  2. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!