With 2013 in the rear-view mirror, Range Resources Corp. plans to spend more this year on a continuing strategy aimed at growing reserves and doubling production every four years, as the company's top executive believes the Marcellus Shale drilling program is still in the "early innings."
The Marcellus program, which began in 2005 when the company brought the play's first horizontal well online, has propelled the Houston producer to the front of the pack where it's now the Appalachian Basin's largest wet gas producer. In December, Range reached a milestone when its Marcellus production reached 1 Bcfe/d (see Shale Daily, Dec. 17, 2013).
Nearly a decade in the Marcellus has earned Range a distinct experience in the play, but during a conference call to discuss 4Q2013 and year-end earnings on Wednesday, officials stressed that they're far from finished when it comes to growth. But it’s not without its challenges, featuring a competitive northeastern market, volatile basis differentials and still-lingering capacity constraints.
CEO Jeffrey Ventura acknowledged those hurdles during the call, amidst one of Northeast's coldest winters in 35 years that's sent the gas market on a wild ride and back-weighted production for Range and others to the second half of the year.
To counter those concerns, though, Ventura highlighted a plan to aggressively sell Appalachian gas to nontraditional markets and push the well type curves in the Marcellus to higher levels with longer laterals and more hydraulic fracture (frack) stages.
Production for 2013 averaged 940 MMcfe/d -- hitting the company's annual growth target of 25% -- while 4Q2013 production increased 20% from 4Q2012 to reach 1.01 MMcfe/d. Oil and natural gas liquids (NGL) production increased 35% over 4Q2012 as well.
Although the company has other operations in Oklahoma’s Mississippian Chat, the Permian Basin in West Texas and the Texas Panhandle, the Marcellus program accounted for nearly 80% of 2013 production. Range produced 742 MMcfe/d in the Marcellus last year.
"We feel comfortable that we can grow at 20-25% for many, many years,” said Ventura. “We're already getting that growth rate with a cash flow outspend, depending on where commodity prices are at. If you project a few years forward, depending on where those prices are, we'll be getting 25% within cash flow.
"You'll continue to see us get longer on the lateral, but we don't want to get so long that we really cause our optimal recoveries to suffer. Right now, in southwest Pennsylvania for sure, our recoveries per thousand foot of lateral are class leading.
“The Marcellus rock is just getting better and better. I still think we're in the early innings of the ball game and that's a lot different than what we've seen in other plays."
Ventura said Range eventually expects overall demand for natural gas to spike, but until then -- and despite significant experience with mitigating the winter impact on production -- the fourth quarter results demonstrated that it's not immune to the broader challenges facing other operators in Appalachia.
Fourth quarter profits fell to $28.2 million (17 cents/share) from year-ago earnings of $53 million (32 cents). Realized commodity prices in the final quarter, after adjusting for hedges, averaged $4.79/Mcfe, down 10% from 4Q2012. Total revenue and other income dropped 6.5% to $428.1 million. Full-year profits in 2013 were $116 million (70 cents/share) from $13 million (8 cents) in 2012.
Although company officials offered few details when pressed by financial analysts on the possibility of a back-weighted production profile caused by cold weather, Ventura said it’s simply a fact of operating in the Northeast.
"As far as production always being back-end loaded; there's a simple fact in Appalachia that we can't mess with Mother Nature,” he said. Chesapeake Energy Corp. and other operators have reported much the same (see related story).
“If we could figure out how to warm...up in January and February we wouldn't have these six-week periods that we consistently have every year," he said. "It's so hard to frack when its negative 15 or 20 degrees outside. Even with all the planning we do, I don't think we'll ever get to a point where we can just sail right through. It will be this way forever, and we forecast that in our numbers for the beginning of the year; we've done that for as long as I can remember."
Range exited 2013 with a backlog of 17 wells. Analysts feared that production could be slightly hampered by abnormally cold weather during the first quarter as well.
It drilled 219 wells and made two recompletions last year with a $1.3 billion in capital expenditures. Of the total wells drilled, 141 were drilled in the Marcellus Shale. By bumping its capital budget up to $1.5 billion this year, Range plans to turn 163 net wells into sales in the Marcellus and Midcontinent.
Company officials also highlighted a plan to increase the lateral lengths on wells in the Marcellus core in southwest Pennsylvania to between 4,200 and 5,300 feet and increase the amount of frack stages to 23-25. Although the wells would cost more, Range expects the type curves for its super-rich liquids acreage in southwest Pennsylvania to reach 2.05 million boe this year and type curves on its wet gas acreage to reach 12.3 Bcfe.
Rising production volumes have Range focused on marketing, which financial analysts have said would help long-term growth strategy. Last year, Range added 25 new natural gas customers in the South, Southeast, Mid-Atlantic and Midwest.
Range currently has 1.1 Bcf/d of firm capacity secured and expects it to increase to 1.6 Bcf/d by 2016. By 2017, Ventura said the company anticipates that it would have the capability of selling gas to customers as far west as Wisconsin, moving 4-5 Bcf/d from the Appalachian Basin by then.
Ethane, too, is posing a problem for Range's liquids revenue, which is expected to account for more than two-thirds of the NGL barrel in 2014. Range recently began shipping ethane on the Appalachia-to-Texas Express (Atex) (see Shale Daily, Dec. 5, 2013) and Mariner West. In 2015, ethane shipments should expand on Mariner East when the pipeline is operational (see Shale Daily, Sept. 9, 2013).
"If all three of those marketing arrangements were fully operational today, Range's ethane revenue would increase by 25%, compared to just leaving it in the gas stream," Ventura said. "That's net of all transportation and processing costs, including propane recovery. I believe this is the best ethane sales portfolio for any company in the U.S."
With additional takeaway capacity, Ventura added that Range could soon be producing 3.5 Bcfe/d in the Marcellus Shale.