EQT Corporation (NYSE:EQT) announced that the company would suspend development of the Huron play on its acreage in the Appalachian Basin. The company cited lower natural gas prices for the action, coupled with a stated goal of operating within its cash flow in 2012.
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EQT considers the Huron play to include various associated formations, including the Lower Huron, Cleveland, Berea sandstone and other Devonian shale plays.
The company was fairly active in the Huron play in 2011, drilling 115 gross wells into these formations. This drilling accounted for just over half of the company's drilling during the year, and exceeded the development in the Marcellus Shale.
The suspension of drilling in the Huron play created a collateral impact on the company's operations. The company reduced its production guidance by 5 billions of cubic feet equivalent (Bcfe) in 2012, and removed all of its Huron proved undeveloped reserves from the proved category. EQT Corp reported 383 Bcfe of Huron proved undeveloped reserves at the end of 2010. (To know more about oil and gas, read Oil And Gas Industry Primer.)
EQT Corporation has been transitioning development from the Huron to the Marcellus Shale for a number of years. In 2008, the company drilled less than 20 wells into the Marcellus Shale, compared to nearly 400 in the Huron. Last year, the Marcellus Shale drilling accounted for just under 50% of the company's gross well count.
The company has 2.7 million acres that is prospective for the Huron play. The acreage is spread across West Virginia, Kentucky, Virginia and Ohio.
It estimates that the average cost to drill and complete a Huron well is $1.5 million, with the well having an estimated ultimate recovery of 1.0 Bcfe. The company's original plan entailed drilling 120 wells here in 2012.
One can understand the company's decision to suspend the Huron development by examining EQT Corporation's published estimates of the returns here over the last 18 months. In August 2010, the company estimated that the average Huron well had an after-tax return of 23% at a $6 New York Mercantile Exchange (NYMEX) natural gas price.
In January 2012, its estimated internal rate of return was down to 15%, assuming a $4.50 NYMEX natural gas price. Prices are now far below this level, implying a much lower return for the company.
Other operators that have exposure to the Huron play include EXCO Resources (NYSE:XCO), which has 121,000 net acres. Range Resources (NYSE:RRC) is also involved with the Huron and reported drilling 10 horizontal wells into this play in the third quarter of 2011.
One company that has exposure to the Huron on the infrastructure side is MarkWest Energy Partners (NYSE:MWE). The company plans to increase processing capacity by 150 million cubic feet per day to support drilling here, and in other plays in the northeast United States.
The Bottom Line
EQT Corp has walked away from the Huron play, at least temporarily, and will not drill wells here until prices for natural gas rebound to levels that allow the company to internally fund its drilling activity. If every other exploration and production company had adopted the same strategy and not blindly pursued growth at all costs, then perhaps the situation in the natural gas markets might never have gotten so bad. (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.