3 Companies Banking on 2 Simple Equations

“Hopefully everyone woke up in a warm house, powered by natural gas… we have plenty to go around,” the President and CEO of Cabot Oil told a crowd of nearly 4,000 in Pittsburgh.

Last week I attended a timely event in the heart of Pennsylvania’s shale boom. At Hart Energy’s Developing Unconventional Gas Conference the buzz was surrounding two massive natural gas formations, the booming Marcellus shale and the up-and-coming Utica shale play.

Today I want to share with you further proof that these booming shale plays are economic at current prices – and as efficiencies in drilling and completion techniques continue to evolve so will the opportunity to profit.

You’ll also get my three favorite “local” producers in the region…

Across the board we’re continuing to see reduced drilling times, lowered completion costs and higher well production, per well.

Taking a step back, geologists have always know there’s oil and gas trapped underneath soil in America’s Northeast, particularly Ohio and Pennsylvania. Truly, the tough part wasn’t finding oil and gas. Rather, it was having the technology to unlock this massive store of energy, in an economic manner.

Today the economics are working themselves out right before our eyes. What was once said to be “uneconomic” natural gas – since it would cost $5-7 per mmbtu to breakeven – is now looking very economic for producers in the sweetspots.

How economic?

Depending on where a driller spuds his well, you could have profitable natural gas at 40 cents per mmbtu! Sure, not all sweetspots have economics that lovely. And yeah, that breakeven price includes the sale of “wet” byproducts – things like butane, ethane along with other light-oil condensates. But when you look at the big picture you’ll see that specific producers are cracking the code for this Northeast shale bonanza.

In the process, you and I are witness to a brand new type of energy revolution in America. Instead of the Jed Clampett style “gushers” we saw back in America’s early energy days, this new swath of energy will take some work to produce. Indeed, this aint like shooting a gun at the ground and watching oil bubble up!

Here in the new energy revolution we’re seeing natural gas producers “crack the code” to shale formations, making it possible to produce massive amounts of shale gas economically. It’s not the same type of revolution, but it’s a profitable revolution nonetheless!

You see, as efficient producers continue to produce natural gas and “wet” byproducts they’re learning a thing or three. Across the board we’re continuing to see reduced drilling times, lowered completion costs and higher well production, per well.

This is as simple an equation as you’ll find in the resource space — de-risked geology, lower costs and more production. Now is the time to play efficient shale producers in the Marcellus and Utica formations.

“That sounds well and good” you may say, “but what about the long-term outlook for natural gas prices? Won’t increased drilling and production drop prices further?”

Ah ha! That’s another simple equation. Currently natural gas prices are floating around the $3.50 to $4 level. I’m very confident that we’re not going to see a severe drop in prices any time soon – and I’ve got the proof to back it up.

First up, we’ve got history on our side. The last time natural gas prices dropped – down to the bargain basement price around $2/mmbtu – they rebounded impressively. The reason is simple. America – and our power generation industry in particular — is proficient at using cheap energy. So when natural gas prices dropped to $2 in 2012, they quickly recovered. That’s because many coal-fired power plants were shuttered and natural gas burners fired up. It’s a mechanical basement for prices.

Along with that we’ve got several large areas for demand that could also keep prices buoyed. As I type the U.S. Dept of Energy is in the process of approving natural gas export terminals. More exports means more demand. Next up we’ve also got a huge Shell Oil ethane cracker (think, huge user of natural gas) ready to break ground in Pennsylvania. Not to mention more plans for Sasol and Shell to develop natural gas to liquids (GTL) plants near the Gulf of Mexico.

Power plant demand… nat-gas powered manufacturers… natural gas exports… a huge ethane cracker project and possible GTL plants… trust me there’s plenty of factors creating a floor for nat gas prices these days.

Add it all up and we’re seeing economic drilling that’s getting better by the day, along with stable prices for as far as the eye can see. Now is indeed the time to look at our favorite nat gas producers!

Here are three companies to keep in mind when looking to play this Northeast shale boom:

Cabot Oil & Gas (COG) – 74% of 2014 budget spent towards Marcellus, increasing efficiencies in drilling and rig-move times, lowered costs per well, growing gathering capacity, 25+ years of drilling inventory at current levels. Approximate breakeven in Susquehanna County (Northeast PA) is $1.95 for dry gas.

Range Resources (RRC) – According to Jeffrey Ventura, president and CEO of Range, the company has “20-25% growth” for as long as they can see. That means the company could double its current production every 3-4 years. The company also has lots of stacked plays in Southwest Pennsylvania. Their acreage is largely “de-risked” meaning they know the rocks they are drilling into have gas, and they know how to get it. Approx breakeven in Washington County (Southwest PA) is $0.40 for dry gas.

EQT Corp (EQT) – “EQT looks like the most effective driller” in Greene County, Pennsylvania, according to Cameron Horwitz an analyst at U.S. Capital Advisors. The company holds massive acreage in Pennsylvania’s Marcellus. Production is starting to really ramp up, too. Approx. breakeven in Greene County (Southwest PA) is $2.05 for dry gas.

(**Note: breakeven estimates come from U.S. Capital Advisors)

Year to date all three companies have been showing shareholders a solid return – 37% for COG, 23% for RRC and 44% for EQT. Looking forward as these sweetspot producers gain more efficiencies I’d expect to see more of the same. Stay tuned!

Keep your boots muddy,

Matt Insley
for The Daily Reckoning

Ed. Note: If you’ve been reading the Daily Resource Hunter, you’re already way ahead of most investors when it comes to the nat gas market. And the story is just beginning. As Matt points out, there is still plenty of room to grow in this market. Don’t let another day pass you by. Sign up for the Daily Resource Hunter, for FREE, right here.

Original article posted on Daily Resource Hunter

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