After recording substantial production gains in the quarter, Rice Energy Inc. managed to protect against Appalachian basis differentials through hedging and firm transportation contracts to other markets.
“This market has certainly rendered many Appalachian areas uneconomic and has forced most producers to ship development to other areas, or in the case of producers who have no economic acreage at current prices, suspend their development altogether,” CEO Daniel Rice IV told investors during Rice Energy’s third quarter earnings call Thursday.
But as many exploration and production (E&P) companies have had to shift their focus in the current commodity price environment, Rice Energy’s hedging, transportation contracts and midstream assets, among other things, have kept it well-positioned during the downturn, Rice said.
“We think we came in more prepared than most,” he said.
For the quarter, Rice Energy’s total production reached 56 Bcfe, or 609 MMcfe/d, with 68% of that production coming from the Marcellus. Production in 3Q2015 represented a whopping 146% increase over the 22.76 Bcfe the company produced in 3Q2014. In 3Q2015, the company realized an average pre-hedge price of $2.32/Mcf, with a post-hedge realized price of $3.18/Mcf.
Rice said the company expects production to fall off somewhat in 4Q2015 but is forecasting production growth in the longer term to coincide with the addition of 12-15 Bcf/d in takeaway out of the basin through 2017.
“Our analysis suggests that pipeline capacity will eventually surpass in-basin production, which should result in Appalachian basis differentials improving faster than expected over the next 24 months,” he said. “As a result, expected production growth in excess of our firm transportation will greatly benefit from this anticipated recovery pricing.”
Rice updated investors Thursday on the latest results from the E&P’s pilot Pennsylvania Utica well in Greene County, the John Briggs 50U.
Rice said the well results so far have mirrored the company’s Utica wells in Belmont County, OH.
“The only discernible difference between the two is the more favorable pressures and depths in Pennsylvania, which is approximately 3,500 feet deeper,” Rice said.
After 60 days of clean-up, John Briggs 50U is producing at 12 MMcf/d with decline profiles “exactly in line with what we’ve observed from adjacent Greene County wells and Belmont County, Ohio wells,” he said.
But while well-positioned to take advantage of the Pennsylvania Utica’s promise, Rice said the company is likely to focus its capital on Marcellus and Ohio Utica wells in the near-term.
“Getting up the learning curve with $20-$30 million wells is an expensive proposition, and we think Pennsylvania Utica has the potential to eventually compete with our Marcellus and Ohio Utica returns, but this isn’t the right market to really begin its development,” Rice said.
As for the midstream, Rice Energy on Thursday announced the drop-down of its water services to its midstream affiliate, Rice Midstream Partners LP (RMP), for a cost of $200 million paid out to Rice Energy subsidiary Rice Midstream Holdings LLC (RMH).
Before the end of the quarter, RMH agreed to enter a joint venture (JV) with Gulfport Energy Corp. to develop midstream assets in the Ohio Utica. RMH will own a 75% stake in the JV, which Rice said will invest $520 million in gathering/compression and $120 million in water distribution over the next six years.
Rice Energy posted net income for the quarter of $65.1 million (43 cents/share), compared to a net loss of $6.86 million (5 cents/share) in 3Q2014. Third quarter operating revenues came in at $143.6 million before expenses, with the company posting an operating loss of $17.6 million.
RMP, the midstream affiliate, posted a net income for the quarter of $12.27 million (21 cents/share) compared to a $10.75 million loss in 3Q2014.