What We Learned about the Marcellus Shale During Earnings Season
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The Marcellus Shale saw lower activity during the second quarter of 2012 as operators shifted capital out of many dry gas areas of the play. This downtrend in drilling activity may continue for the rest of 2012 unless natural gas prices move higher.
Overview
The Marcellus Shale is present in parts of the Appalachian Basin, with most development concentrated in Pennsylvania and West Virginia. The oil and gas industry flocked to this play over the last few years due to lower breakeven economics and proximity to energy consumers in the northeast. This gold rush has now reversed as natural gas prices fell, making other plays more economical to develop.
Marcellus Shale Production
The Pennsylvania Department of Environmental Protection reported total production of 895 billion cubic feet of natural gas from the Marcellus Shale during the first six month of 2012. This was up from production of 435 billion cubic feet in the same period in 2011.
More Cuts in 2012 and Beyond
Chesapeake Energy (NYSE: CHK) is drilling with ten operated rigs in the northern portion of the Marcellus Shale and plans to drop several of these rigs over the next six months. The company expects to operate an average of six rigs in the Marcellus Shale for the balance of 2012.
Since Chesapeake Energy is operating in a capital-constrained environment, the company is also reducing activity in wet gas areas of the Marcellus Shale. The company is operating seven rigs in these areas and plans to operate an average of six rigs for the rest of 2012.
EOG Resources (NYSE: EOG) budgeted $750 million in capital spending for the Marcellus Shale and other dry gas plays in 2012 with a goal of converting its leases from term to held by production. The company expects to have few term leases left in these dry gas areas by the end of 2012, implying little or no spending here in 2013 absent higher natural gas prices.
Carrizo Oil and Gas (NASDAQ: CRZO) is operating one rig in the Marcellus Shale and plans to keep this rig working through the end of 2012. The company is also operating one hydraulic fracturing crew and will complete two additional wells in Pennsylvania and then suspend additional completion activity until December. Carrizo Oil and Gas also disclosed that fracturing costs declined in the Marcellus Shale during the second quarter of 2012.
More Productive Wells
Some operators reported more productive wells in the Marcellus Shale during the second quarter of 2012. Noble Energy (NYSE: NBL) is drilling in West Virginia and Pennsylvania and has seen better than expected well results in some places. The company raised its estimated ultimate recovery (EUR) and now believes that its Marcellus Shale acreage holds net risked resources of 10 Tcf, up from the original estimate of 7 Tcf.
One area where Noble Energy has seen better wells is in southwestern Pennsylvania, where the company raised the EUR on dry gas wells by 17% to 7 Bcf per well.
Atlas Energy (Nasdaq: ATLS) is active in the Marcellus Shale through its ownership interest in Atlas Resource Partners (NYSE: ARP), and reported the “best producing” Marcellus Shale wells in the company’s history during the second quarter of 2012. The initial production rates on these record wells ranged from 15 million to 20 million cubic feet of natural gas equivalents per day.
Glimmer of Hope?
Talisman Energy (NYSE: TLM) is drilling with only one rig in the Marcellus Shale and during the company’s second quarter of 2012 conference call expressed surprise that production from this play has held up while drilling activity was reduced. The company is finally seeing a decline in production and expects Marcellus Shale production to average 490 million cubic feet of natural gas equivalents per day in 2012.
Talisman Energy has “high quality” Marcellus Shale acreage in Susquehanna County, Pennsylvania, that expires in 2014 and the company plans to increase activity here beginning in 2013 to hold this acreage.
Although the Marcellus Shale was once thought to be invulnerable to the issues facing other domestic natural gas plays, this view proved to be too optimistic. This area will probably see a continued drop in activity for the rest of the year and into 2013 unless commodity prices move higher.
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