Cabot Oil & Gas Corp. on Friday said tests in the upper Marcellus Shale demonstrate the interval is a “distinct” target with results exceeding “the majority of assets” across Appalachia that’s likely to extend the life of its drilling inventory in Northeast Pennsylvania by over a decade.
Over the last two years, the company has placed 25 upper Marcellus wells on production, with an average estimated ultimate recovery (EUR) per thousand lateral feet of 2.7 Bcf, roughly in line with an earlier batch of wells drilled to the horizon. The company has so far drilled 50 wells in the upper Marcellus. That compares to the 700 it’s drilled in the lower Marcellus, Cabot’s primary target, where it has nine years of inventory left.
“We plan to continue to test a limited number of upper Marcellus wells annually to further optimize lateral placement and completion designs,” said CEO Dan Dinges during a call on Friday to discuss year-end results. Including the lower Marcellus, he added that the company’s assets in Northeast Pennsylvania provide it with over two decades of remaining drilling inventory.
The upper Marcellus is thick at about 140-300 feet, meaning lateral placement is even more important. Cabot will test another five wells in the target this year in Susquehanna County, PA, the only county in which it operates. Recent legislative changes in the state, Dinges added, will allow the company to drill laterals up to 40% longer in the zone than it has in the past.
“That 10,000- or 12,000-foot lateral that we’re going to lay out in the upper is going to create its own efficiencies — more so than we realized in the lower — and with that development layout it is our anticipation that we’re going to narrow the gap on the return profile on the delta between the EUR per well that we see in the upper as opposed to what we see in the lower,” Dinges said of the prospect.
Talk of the tests was a highlight on the call for the gassy operator as it continues to wrestle with lower prices. Given a volatile market, Cabot said earlier this month that it would slash spending to $575 million. The program is expected to deliver slight year/year volume growth of 2.4 Bcfe/d, with the production increase forecast for the second half of the year based on the timing of wells being placed to sales.
The company spent a little more than $783 million last year. It produced roughly 2.5 Bcfe/d in the fourth quarter, up 10% from the year-ago period. For the full year, Cabot produced just under 2.4 Bcfe/d, which consisted of 100% natural gas.
The 2020 program, based on a forecasted average Henry Hub price of $2.25/MMBtu, would still generate positive free cash flow (FCF) and cover the company’s dividend commitments. Cabot generated $563.1 million of FCF in 2019, its fourth consecutive year of doing so. It also returned $665.4 million to shareholders through dividends and share repurchases during the year.
“We believe our current plan is the appropriate level of capital investment in this market environment,” Dinges said. “However, we will continue to assess the outlook for the natural gas market in 2020 and 2021, and are prepared to discuss capital spending reductions further if market conditions warrant.
“…I would also add that while we are fully prepared for a continuation in this lower natural gas price environment, we believe that current activity levels across the country are not sustainable at these prices and ultimately market forces should move natural gas supply” and create “a more sustainable balance in the future.”
Including derivatives, the company said natural gas price realizations in 4Q2019 were $2.15/Mcf, down 31% from the year-ago period. For the full-year, prices declined by 4% to average $2.45/Mcf, including derivatives.
Despite lower prices, Cabot reported fourth quarter net income of $146.9 million (36 cents/share), compared to net income of $275 million (64 cents) in the year-ago period. For 2019, the company earned $681.1 million ($1.64), versus net income of $557 million ($1.25) in the prior year.
Want to see more earnings? See the full list of NGI’s 4Q2019 earnings season coverage.
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