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Marcellus 'Only Basin' to Drill Dry Gas Today, Says Analyst

The Marcellus Shale is the "best gas play" in the United States and at current price levels, "the only basin where dry gas should be drilled," analysts with Tudor, Pickering, Holt & Co. (TPH) advised in a new report.

The TPH research team took a look back at 2011 and a look forward in a new North American exploration and production (E&P) report that deals not just with gas but also with oil prospects in North American basins.

Last year can best be summed up in one word, "volatility," said the analysts. The E&P index fell 7% year/year with a 30% standard deviation. However, the Marcellus Shale "heavyweights" rose above the fray, with Cabot Oil & Gas Corp., Range Resources Inc. and EQT Corp. the "clear winners."

Even though market sentiment on the gas industry was poor through last year, the Marcellus-aligned producers benefited from a "significant shift in perception of asset quality" because of the northeastern play. The Marcellus Shale "is working at low gas prices."

Cabot on Thursday said it realized more than $3.90/Mcf in 4Q2011 for its Marcellus gas in northeastern Pennsylvania, the result of the market price, which averaged around $3.18, and hedged gas prices of more than $5.17 that covered 215 MMcf/d of output. In January, the market price of gas sold is about $3.00/Mcf and when combined with hedges covering about half of daily volumes, the overall Marcellus realization is "in excess of $4.00/Mcf."

January also will be Cabot's first month for deliveries to the Transcontinental Gas Pipe Line (Transco), which includes sales of more than 200 MMcf/d "at pricing that exceeds traditional Tennessee Gas Pipeline pricing," Cabot noted. "This will help temper negative swings in price..."

According to TPH's basin analysis the "next regions that become uneconomic are the core Haynesville, Barnett and Fayetteville," and "pain early" could shift this trade "from short lived to an investment if more than our forecasted minus 135 y/y gas rig cut happens."

With gas prices falling below $3.00/Mcf and supply growing 11% y/y, "investors are looking for signals that gas supply/demand is improving," said the TPH team. "We see two paths for gas, 'pain early' and 'pain late.'"

The early pain, said analysts, has resulted from a lack of winter weather, forced withdrawals from gas storage, lower spot prices and a dramatic reduction to activity levels early in 2012. Talisman Energy Corp. earlier this week announced a big cut to its gassy '12 E&P spending as it shifts to more oily leaseholds.

However, there's more pain to come as gas shut-ins begin when storage begins to fill in August and September, said the analysts. The "big gassy E&Ps" in the Haynesville Shale likely may cut activity by 3% and even deeper cuts to rig counts may be in the offing.

Service costs are expected to improve in 2012 but regional pressure points are sure to persist.

"We're forecasting total U.S. rig count to increase modestly in 2012 (plus-2% y/y), with plus-25% y/y of pressure pumping capacity being added. However, horizontal oil plays likely remain tight as robust growth is expected in the Permian (plus-50% y/y) and Bakken (plus-25% y/y). Bias to our 2012 estimates is lower gas rig count and higher oil rig count."

For now, oil remains the "go-to" commodity, with the horizontal drilling in the once old, now new again Permian Basin the "hot play," said the TPH team. "Horizontal success will improve economics, lower marginal costs and decrease the sensitivity of the basin to crude prices. Other emerging areas to watch are the Mississippi Lime and the Utica, where public and private industry guys are more excited than investors."

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