Stone Energy (NYSE:SGY) plans an active development program in the Appalachian Basin as the company focuses on areas of the Marcellus Shale that produces liquid hydrocarbons along with the natural gas production.

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Marcellus Shale Overview
Stone Energy has 80,000 net acres in Pennsylvania and West Virginia that are exposed to the Marcellus Shale. The company reported proved reserves of 170 bcfe at the end of 2011, and is currently producing 35 million cubic feet of natural gas equivalents per day. Only 20% of this production was composed of natural gas liquids and Stone Energy hopes to increase this percentage through a focus on wet gas areas of the Marcellus Shale.

2012 Capital Budget|
Stone Energy has established a $625 million capital budget in 2012, with approximately $199 million, or 32% of the total allocated to advance the development of properties in the Appalachian Basin that are prospective for the Marcellus Shale.

Stone Energy plans to drill and complete 25 horizontal wells in 2012 at the Mary and Heather project areas in West Virginia and estimates that this development program will result in production of 60 million cubic feet of natural gas equivalents per day at the end of 2012.

At the Mary field, Stone Energy is seeing condensate and natural gas liquids production of 120 barrels for every million cubic feet of natural gas. The company is involved in a joint venture with Magnum Hunter Resources (NYSE:MHR) at the Heather Field, and is currently drilling 11 wells from two separate pads in this field.

SEE: Oil And Gas Industry Primer

Operational Efficiency
Stone Energy has become more efficient at drilling Marcellus Shale wells over time, and has reduced the cost to drill and complete a well from $6.7 million in 2010 to an estimated $6.3 million in 2012. The company has accomplished this while drilling longer horizontal well laterals and using a greater number of fracturing stages when completing wells.

Ultra Petroleum (NYSE:UPL) is also active in the Appalachian Basin and plans to drill 31 net wells into the Marcellus Shale in 2012.

SEE: What Determines Oil Prices?

Other Plays
Stone Energy believes that the company has exposure to other plays on its acreage, including the Utica Shale and various Upper Devonian formations. The company is securing the mineral rights to these while allowing other operators to prove the productivity of these emerging plays.

Range Resources (NYSE:RRC) is testing the Upper Devonian shale on its acreage, and has drilled two wells to date into this play. The company reported average initial production of 3.8 million cubic feet of natural gas equivalents per day for these wells. Range Resources plans to drill two more wells in 2012 targeting wet gas areas of the Upper Devonian.

SEE: A Guide To Investing In Oil Markets

The Bottom Line
Stone Energy is not abandoning natural gas development despite recent low commodity prices. The company plans to achieve acceptable returns in the Marcellus Shale through the development of wells that produce liquids in the production mix.

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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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