Fort Worth, TX-based Range Resources Corp. is pulling up stakes in the Barnett Shale of North Texas and redeploying its efforts and capital in the Appalachian Basin's higher-return Marcellus Shale.
Range struck a deal to sell its Barnett properties to Legend Natural Gas IV LP for $900 million. The Marcellus Shale is to get the lion's share of the company's 2011 capital budget. The deal accomplishes two things in Range's view. It allows the company to ramp up activities in the Marcellus, and it puts Range on track to be cash flow positive by 2013, CEO John Pinkerton told financial analysts during a conference call last week.
Some producers wouldn't have sold their Barnett Shale assets and instead would have flat-lined activities there while they headed for the greener pastures of the Marcellus, Pinkerton conceded. But Range wanted to straighten its balance sheet and go at the Marcellus full bore, which it is now set up to do.
..."[A]t $4.50 flat Nymex [New York Mercantile Exchange] gas prices, our drilling projects in the Marcellus, where we are spending 86% of our  capital budget, generate over a 50% rate of return," Pinkerton enthused to financial analysts during an earnings conference call. "It's pretty amazing."
By comparison, in the Barnett the company can expect a rate of return in the high teens or about 20%, he said. "So the question is pretty easy for me, not being the brightest bulb in the package. I'd rather spend the money in the Marcellus. So that's why I sold the Barnett."
What makes the Marcellus particularly attractive, besides the liquids-rich component of the play, are the Upper Devonian and Utica shales -- the Upper Devonian above the Marcellus and the Utica below. It's a three-layer cake of gas and liquids. "We like it because it's really three plays in one," Pinkerton said.
"A very significant advantage we will have in developing the Upper Devonian [and] Utica will be that we will be drilling where we've been drilling Marcellus wells. We've already incurred the cost of acreage, roads, surface location, water management, gas lines and compression." Pinkerton said the incremental cost to develop the Upper Devonian and Utica will be about one-third of that to develop each the three zones on a standalone basis.
"...[W]e don't have most of the acreage [in the Marcellus] held by production," Pinkerton said. "And so that's one of the primary reasons we want to sell the Barnett is to term out all those leases. We're about 46% held by production in the Marcellus...We will hold 700,000 acres through the plan..."
To keep costs down it's important that the company block up its acreage, Pinkerton said. "If you have to drag rigs all over creation up there and then your pipelines and your gathering, your water impoundments and your water gathering, it really drives up your cost," he said. Other Marcellus producers are coming to the same conclusion, he said, so the attitude toward acreage swaps among producers is softening and it's easier to get deals done.
Range takes credit for the first horizontal wells in the Upper Devonian and the Utica Shale. The company's first Utica Shale well averaged 4.4 MMcf/d on a seven-day production test, Range said recently.
"Our focus is going to be almost all on the Marcellus," said COO Jeffrey Ventura. "We're really encouraged by what we see in the Upper Devonian. We've drilled and completed a couple of wells. We're in the process of testing the second well, and the same with our first Utica well...[I]t was Range alone leading the charge in the Marcellus and then several other companies coming in and helping to de-risk our acreage. You're going to see the same thing, I think, happen with the Utica and Upper Devonian."
The Utica is 2,000-2,500 feet deeper than the Marcellus, and very few wells in the basin reach the Utica, Ventura said. "So by definition the Upper Devonian is lower risk; there's a lot more control, a lot more data than in the Utica. Plus, it's somewhat of an advantage in that it's shallower, so the wells are going to be less expensive...But it's early, and I'm sure there's going to be a number of Utica wells drilled this year by others, plus the couple of wells we may drill."
Much of Range's acreage is in the wet portion of the Marcellus, Ventura said, noting that the "wet-dry line" in the Upper Devonian will be similar to that in the Marcellus, giving the company liquids-rich gas from the Upper Devonian, too.
Pinkerton allowed that he would have preferred to be selling the Barnett assets in a higher price environment and if gas prices do indeed climb, Range might have left a bit of money on the table. However, Pinkerton said the company views the transaction as essentially a like-kind exchange of Barnett for Marcellus properties; however, the Marcellus properties will be acquired over the next 18 months to two years.
Current Range production in the Marcellus is about 260 MMcfe/d net from both the southwest and northeast areas. At the end of the year the Marcellus division had drilled 52 horizontal wells that were waiting on completion and 15 wells waiting on pipeline connection. Range said it is on schedule to achieve its Marcellus Shale year-end 2011 production exit rate target of 400 MMcfe/d net.
Range's 2011 capital budget was set at $1.38 billion and includes $1.13 billion for drilling and recompletions, $160 million for land, $55 million for seismic and $35 million for pipelines and facilities. About 86% of the budget will be directed toward the Marcellus Shale play. The remainder is allocated as 6% for the Midcontinent, 4% for Appalachia and 4% for the Southwest.
The Barnett properties being sold encompass 390 producing wells covering about 52,000 net acres. Current production is 113 MMcfe/d. The company said late Monday it is retaining certain nonproducing acreage in the Barnett, which it values at about $50 million. The sale is expected to close in late April, subject to conditions and price adjustments.
Pinkerton said the company could have done a joint venture in the Marcellus to soften its costs -- instead of selling the Barnett assets -- however, he said selling the Barnett was a more accretive move given the promise of the Marcellus. "...I'm telling you, it's a world-class field. We've got the tiger by the tail. The good news is I think we've got a plan, and I think that we've connected the dots...
"We think ultimately we'll get to 2 Bcf or 3 Bcf a day net to our interest. That will be huge, and our shareholders are going to make a whole bunch of dough from that, including yours truly..."
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