For the first time since going public in January, senior officials at Rice Energy Inc. on Thursday laid out a development plan that looks as far ahead as 2016 and made a case for why they believe the pure-play Appalachian company is poised for unique growth.
The company's 2014 guidance missed the Street's expectations, and financial analysts shared concerns about a completion schedule that has been delayed by at least a quarter due to brutally cold weather in the Northeast this winter.
Yet, an increase in this year's spending and a nuanced plan for development had analysts looking ahead with a company described by its CEO as not so much focused on production growth, but on doing things right to maximize value in the long-run.
"I wouldn't necessarily say we outgrew Natural Gas Partners or the private equity business model, but what I would say is that a company on our growth trajectory with production volumes at the magnitude with which we are planning requires a strategic horizon that extends beyond normal private equity investment," said CEO Daniel J. Rice. "We're positioning the company today with a five- to seven-year plan that is most impactful within a much longer investment horizon."
Rice completed its initial public offering of 50 million shares in January, netting $594.5 million in the process (see Shale Daily, Jan. 31). The IPO was billed as a success, but a question mark hung over the Canonsburg, PA-based company, which received $300 million in private equity investments from Natural Gas Partners prior to going public (see Shale Daily, Dec. 17, 2013).
Seven of the company's top 12 executives, including Rice and CFO Grayson Lisenby, are under the age of 35 (see Shale Daily, Jan 15). What's more, a highly competitive and oversupplied market in the Northeast cut into some producers earnings last year, and midstream constraints continue to hamper results in the Utica and Marcellus where Rice conducts it operations.
On Thursday, though, Rice's top executives moved to shore up confidence in those operations. Last year, Rice produced 46 Bcf of natural gas -- a 166% increase from 2012 -- across 43,351 net acres in the Marcellus Shale of Pennsylvania.
The company increased this year’s capital expenditures budget to $1.2 billion and plans to dedicate 74% of its drilling and completions budget to the Marcellus, where it has big plans across its acreage block in southwest Pennsylvania this year.
The company has drilled more than 50 horizontal wells there with average lateral lengths ranging from 2,200 feet to 9,200 feet. Last year, Rice brought online 22 Marcellus wells with an average lateral length of 6,500 feet and a 60-day gross initial production (IP) rate of 11 MMcf/d. Given its data set in the Marcellus, Rice said the company is developing its acreage under a single type curve and he believes it has between 3-4 Tcf of recoverable reserves in the play.
This year, the company plans to produce 260-310 MMcf/d in the Utica and Marcellus, the midpoint of which is lower than the 304 MMcf/d forecast by financial analysts.
Aside from the midstream constraints that had it falling short of expectations, the company has switched its focus to pad drilling in the Marcellus, where it's designing each to handle between 8-16 wells. The strategy, Rice said, means a longer lead time from spudding a well to production, which he estimated could take up to 8 months.
Given that time frame, Rice will spend significantly to drill some wells that won’t be producing until 2015. In all, the company plans to turn 37 Marcellus wells and seven Utica wells into sales this year.
The company is still trying to get a handle on its Utica drilling program, where it has run into some completion issues. It holds 46,488 net acres in Ohio.
"We ran into a complication while drilling our first Utica well, the Bigfoot 7H," Rice said. "We encountered more gas and sustained higher pressures than we were prepared for and we determined that the most safe and timely path forward would be to plug and abandon that well."
The company is now drilling its nearby Bigfoot 9H well in Belmont County, OH and expects to have test results there sometime in the second quarter.
"Our focus in the Utica will be to methodically optimize our drilling and completion techniques before moving to more capital intensive pad drilling," Lisenby said. "In both plays, we're continuing to build our midstream systems and some delays caused by cold weather have pushed completion back a quarter."
The company plans to spend about $385 million this year to acquire 7,000 more acres in Pennsylvania and 3,000 acres in Ohio.
With production costs increasing and higher expenses related depreciation, depletion and amortization, Rice reported a loss of $16.5 million, or 13 cents/share, last year. It did not release figures for 2012.
Its natural gas price realizations were a bit ahead of the Appalachian pack, though. It realized $4.01/Mcf, including hedges, last year. Lisenby said this is because about half of the company's gas is sold on Columbia Gas, with the remainder heading to Texas Eastern M-2 and Dominion Southpoint, which saw better basis prices last year than other hubs in the Northeast such as the Leidy Hub or Tennessee Zone 4.
Lisenby said the company has also focused on building a firm transportation portfolio that sends gas out of the Appalachian Basin and exposes the company to better Gulf Coast pricing.
Rice also plans to spend another $265 million on midstream this year to build out a 1.5 Bcf header system in Ohio and add more than 1 Bcf of gathering capacity in Pennsylvania (see Shale Daily, Feb. 14).