Range Resources Ties Fortunes To Marcellus Shale
Before the Marcellus Shale leaped into prominence as the largest natural gas play in the U.S., there was the Barnett Shale in Texas.
Range Resources ( RRC ) has worked both basins. But the Fort Worth, Texas-based firm is now largely focused on the Marcellus in Pennsylvania, which has fueled most of its growth.
Range Resources is so sold on the Marcellus that it sold off all its holdings in the Barnett. The $900 million in proceeds from that sale two years ago were reinvested into the Marcellus.
"The Marcellus Shale is now larger than the Barnett and the largest gas field in the U.S. by far," said Range's CEO Jeff Ventura. "In fact, you could argue that its reserves' potential makes it the second largest in the world."
The largest is the South Pars/North Dome field in Iran and Qatar. As Ventura tells it, Range "discovered" the Marcellus and "everyone agrees with that."
In looking to find "the next Barnett," Range saw that the Marcellus Shale had a lot of the same characteristics as the Barnett.
That was in 2004. Range began drilling in the Pennsylvania portion of the play soon after, using the then-new hydraulic fracturing techniques needed to crack the hard shale rock in order to extract gas. It found great commercial value there.
"Barnett is a good play, but the quality of the rock and the economics don't really compete with the Marcellus," Ventura said.
He says wells in its southwest Pennsylvania sweet spot produce three times as much as its wells had in the best spots in the Barnett.
Other firms followed Range into the Marcellus in what eventually became a virtual stampede. They includeChesapeake Energy ( CHK ),Cabot Oil & Gas ( COG ),EQT Corp. ( EQT ) andChevron ( CVX ), among others.
"Chevron has good (acreage), but I would argue that ours is better," Ventura said. "They're in the dry (gas) area of southwest Pennsylvania. We have the advantage of having more wet gas, plus we have more net acreage than Chevron, which gives us greater leverage for future growth."
Though Range still has some oil operations in Oklahoma and Texas, most of its production comes from the Marcellus.
Range is currently one of the largest producers in the Marcellus, accounting for 10% of the basin's total production.
While its 1 million net acres may be topped by a couple of other players, Ventura says Range stands out for holding 100% positions in its acreage, unlike others that often form joint ventures and other deals with third parties.
Moreover, most of Range's holdings are in the core region of the play, especially the more lucrative liquids-rich southwest part of Pennsylvania. Liquids-rich gas fetches higher prices than dry gas.
"The best wet gas is in the southwest corner and the heart of it is in our big position in Washington County, the bull's eye of the highest quality rock with the wet gas in it," Ventura said.
Analyst Leo Mariani of RBC Capital Markets says Range has "the largest net acreage position in the wet gas window," which makes it stand out from other operators. He says it's also a low-cost producer with "extremely substantial inventory to drill."
Range operates 500 wells and counting in the Marcellus.
Range expects to grow production 20% to 25% annually for the foreseeable future. At that pace, Ventura says, its output will double about every three years.
At the end of 2012, Range was producing nearly 800,000 million cubic feet equivalent per day. He thinks the firm can get to 1.6 billion cubic feet in roughly three years. And in six years, it would be about 3 billion.
That latter number is significant. It would mean Range would surpass the previous U.S. record set by a single company in a single play, the 2.6 billion cubic feet per day by ARCO in Alaska's Prudhoe Bay oilfield in the late 1970s.
"The largest producing oilfield in the U.S. still is in Prudhoe, though the Bakken may surpass it," Ventura said.
"My expectation is that (Range) will do better than that 20% to 25% (growth)," said Mariani. "Production in the play has grown like a weed for the last several years."
While second-quarter financial results won't be released until Wednesday, Range reported that production volume in the quarter reached a record high of 910 million cubic feet of natural gas equivalent per day. That's a 27% gain over the prior year's same quarter.
Of that total, 79% was natural gas, 15% natural gas liquids and 6% crude oil and condensate.
Natural gas fetched $4.20 per mcf, natural gas liquids $32.92 per barrel and crude oil and condensate $89.09 per barrel.
Natural gas prices have risen from ultralows last year of around $2. Earnings fell 17% last year to 92 cents a share due largely to ultra-low gas prices.
Analysts expect second-quarter earnings to rise 190% over last year to 32 cents a share and end the year 60% higher than in 2012, to $1.47, according to a Thomson Reuters poll. Revenue is seen growing 19% to $1.7 billion.
"You're going to see strong growth and cash flow," Mariani said, adding he expects natural gas prices to keep trending up.
But analysts from Societe Generale caution that greater activity in the Marcellus could create shortages in rigs and services, which could hurt operating margins and cash flow.
And Macquarie Capital analysts note that other challenges may surface in the future if volumes "outrun available take-away capacity."
CEO Ventura doesn't seem too worried: "Infrastructure is better in the southwest part of the state."