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EQT Could Defer Some Marcellus Drilling, Favor More Utica in 2016

Its first well in Southwest Pennsylvania's deep dry Utica Shale has EQT Corp. rethinking its long-term strategy.

Located in Greene County, PA, the Scotts Run well tested in July at a 24-hour rate of 72.9 MMcf/d (see Shale DailyJuly 23). In its first 86 days of production, the well has produced a staggering 2.6 Bcf of natural gas. If the Utica acreage EQT has in Southwest Pennsylvania and northern West Virginia continues to perform anywhere near those rates, "some of our other inventory that requires higher prices to make economic returns would be deferred, possibly for many years," CEO David Porges said.

Management met with the company's board of directors last week to discuss its long-term strategy as it does each October. The company expects an operating plan and capital budget to be approved by December and a "key aspect of discussion in last week's meeting was the impact of the emerging deep Utica play on EQT's strategy," Porges said.

"Given this potential for lower long term gas prices, we do not think it prudent to invest much money in wells [with] all-in after-tax returns that exceed our investment hurdle rates by only a relatively small amount," Porges told financial analysts on Thursday during a call to discuss third quarter earnings. "This decision will affect our 2016 capital plan...The focus in 2016 will be on this more narrowly drawn notion of what the core Marcellus would be, assuming the deep Utica works.

"We will also pursue the deep Utica play with the goal of determining economics, size of resource and midstream needs and on lowering the cost per well to our target range."

While the company has long been a leading Marcellus Shale producer, it also estimates that it has 400,000 net acres of Utica potential. Results from its Scotts Run well have been reinforced by other deep Utica wells drilled by Consol Energy Inc. and Range Resources Corp. in the area, which both tested at more than 50 MMcf/d (see Shale DailyJuly 29Dec. 15, 2014). Range and Consol have said they are considering dedicating more capital to the Utica (see Shale DailyAug. 25).

The Scotts Run well cost about $30 million. EQT believes those costs can come down with more wells -- steps management said it's willing to take to unlock the production and the possibility of higher returns.

"We're making good progress on cost reductions for these wells," said President of Exploration and Production Steven Schlotterbeck. The Scotts Run well has been flowing to sales at a choke restricted rate of 30 MMcf/d. The company spud its second Greene County Utica well in August that's expected to be online by the end of the year. It's also testing Utica acreage in Wetzel County, WV, where it's drilling another well.

That well is awaiting its intermediate casing, but Schlotterbeck said it's already cost 22% less than the Scotts Run. The latest Utica wells have cost about $17 million each, but the company believes it can ultimately drill and complete in the deep Utica for $12.5-14 million per well. EQT said in August that it would suspend its Upper Devonian Shale drilling program to focus on the Utica (see Shale DailyAug. 3). Porges said the company hopes to have a 10-15 well Utica program next year.

The Utica volumes could also create midstream issues. A chunk of EQT Midstream Partners LP's system lies outside the company's core Utica acreage.

"If we see things consistent with those early [Scotts Run] results in future wells, I think we're probably going to be looking at takeaway limitations for awhile," Porges said. "I think these wells can probably support volumes that the midstream wasn't really designed for. It's going to take a little while to figure out what the right midstream configuration is."

Management said next year's exploration and production budget would likely be lower than this year's $1.9 billion. Whatever the Utica mix, it would still account for a small portion of EQT's overall well program. When it announced this year's operating budget, the company intended to drill more than 200 wells. Porges added that it intends to grow year-over-year production by 15-20%.

EQT produced 156.3 Bcfe in 3Q2015, a 27% increase from the year-ago period and up from the 147.1 Bcfe in produced in 2Q2015. Production growth was again overshadowed by lower commodity prices. EQT reported net income of $40.8 million (27 cents/share), mainly on hedge gains. Without those, it reported an adjusted net loss of $50.2 million (minus 33 cents/share).

Average realized prices slid to $2.12/Mcfe in the third quarter, compared to $3.63/Mcfe in the year-ago period. Adjusted net operating revenue -- a new U.S. Securities and Exchange Commission-preferred metric EQT has switched to to exclude the impacts of non-cash derivative gains and transportation and processing costs -- fell from $331 million in 3Q2014 to $188.5 million.

EQT ended the quarter with $1.7 billion in liquidity, including full availability under its $1.5 billion credit facility.

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