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Magnum's Appalachia Output Curtailed As Basin Grapples with Bottlenecks, Permitting

The four-well Stewart Winland pad, operated by Magnum Hunter Resources Corp. and home to the best Utica Shale well yet tested in West Virginia, remains shut in nearly a month after it first flowed at a peak rate of 46.5 MMcf/d in a symbol of some of the broader challenges facing operators in the Appalachian Basin.

The Stewart Winland results announced last month and touted by Magnum since it first began offering updates earlier this year, is considered key to the company's success story in transitioning to an Appalachian pure-play (see Shale DailySept. 25; March 14). Magnum has already divested $125 million in noncore assets this year to focus on the Marcellus and Utica in addition to selling $700 million in similar assets last year (see Shale DailyOct. 2Aug. 11).

More important, though, the pad has been watched closely by analysts and the company's peers as interest continues to grow in West Virginia (see Shale Daily,March 26). Wunderlich Securities analyst Irene Haas said in a note Tuesday the Stewart Winland is only adding to Magnum's pent-up demand in the basin. It has a total of 15 net wells shut-in across two counties there and two in Ohio.

Analysts covering the company have sent out a series of notes on its progress in recent weeks as it plans to sell more noncore assets, shore-up its liquidity, address stubborn bottlenecks and the depressed Appalachian basis that is daunting other operators in the region as well.

The Stewart Winland 1300U was shut-in on Sept. 29, with only about a week of production, according to Wunderlich, which said the company was forced to turn the valves off for safety purposes and state inspectors that have been visiting the site this week.

At the time that Magnum disclosed its Stewart Winland results last month, Haas said three of the producer’s other Marcellus wet gas wells on the pad were shut in while the company awaited a special air permit. She said at the time the West Virginia Department of Environmental Protection (WVDEP) was struggling to keep up with increasing air permit applications. Those wells remain shut in as the company awaits the permit.

WVDEP spokeswoman Kelley Gillenwater said the number of air permit applications the agency has received in the last year or so has “doubled, or perhaps more than doubled from years past.” She said in the first six months of this year the department’s Division of Air Quality has issued more permits than it normally handles in 12 months “due in large part to the booming oil and gas industry.”

In an interview with NGI's Shale Daily last week, Corky DeMarco, executive director of the West Virginia Oil and Natural Gas Association, said only about 5% of the state's shale gas resources have been developed thus far, adding that development is only accelerating as operators scramble to exploit what's available.

As a result of backlogged production and regional bottlenecks, Magnum isn't expected to add any incremental production in the third quarter, with volumes projected to stay flat, according to both Wunderlich and Topeka Capital Markets. Topeka analyst Gabriele Sorbara said the company only has about 30-35 MMcf/d in firm transportation from the basin, but added that it has bids out for an additional 100 MMcf/d.

Although the company is still expected to exit the year producing 32.5 million boe/d, Sorbara said Topeka has lowered its third quarter production estimate for Magnum from 19.3 million boe/d to 16 million boe/d.

However, infrastructure constraints remain a problem nationwide. Sorbara said the natural gas sector has been out of market favor recently on several concerns about profitability related to weaker commodity prices, widening differentials in some regions, service cost inflation and logistical issues.

As a result of bottlenecks and a glut of gas in Appalachia, Magnum's natural gas prices have been "blown out" at the Texas Eastern Transmission Co. M-2 zone, where it prices the majority of its gas, with discounts to Henry Hub forecasted at $1.81/Mcf in the third quarter, compared to a $1/Mcf in the second quarter.

In its latest short-term energy outlook, the U.S. Energy Information Administration expects Henry Hub spot prices to be $4/MMBtu this winter, compared to $4.53 MMBtu last winter, mainly on lower heating demand and a spike in natural gas production.

NGI's Forward Look currently anticipates an average Henry Hub winter strip price of $4.062. Whereas at Dominion, where the effects of Marcellus supply are quite pronounced, the winter strip is only expected to average $2.703.

The glut of Marcellus gas also has analysts forecasting widening differentials at some Northeast trading points through 2015 (see Daily GPISept. 15Sept. 10). Realized gas prices in the third quarter are again expected to remain low for some Appalachian operators as they were in the second quarter (see Shale DailyAug 7Aug. 6July 29July 25July 24).

In the Marcellus of Pennsylvania, 548 wells were shut-in during the first half of this year, with more than 1,000 waiting on pipeline connections, according to state production data (see Shale DailySept. 19). The bottleneck is expected to begin easing in early 2016, with Canaccord Genuity estimating in July that as many as 43 major Appalachian pipeline projects are in the works representing more than 100 MMcf/d of additional capacity through the end of 2017 (see Shale DailyJuly 17).

"We have seen this scenario played out in multiple hot trends and what is happening in West Virginia is not out of the norm," Haas said. "While the Marcellus and Utica are prolific with high rate wells, the key challenges for these plays have always been above ground issues: permitting, gathering and marketing."

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