After careful analysis and increasingly promising wells near its asset base, EQT Corp. on Thursday became the second company this year to announce that it will spud its first Utica Shale well in southwest Pennsylvania in the coming months.
EQT joins Range Resources Corp., which said in June it was preparing to drill the region's first Utica well in Washington County (see Shale Daily, June 5). Given EQT's heavyweight status in the Marcellus -- where thousands of drilling locations and hundreds of horizontal wells from Pennsylvania to West Virginia have driven "beat and raise" expectations on a quarterly basis -- financial analysts were all ears as the company highlighted its plans.
"As we look at the initial results of the wells drilled so far in the [Utica] play by other operators, our technical teams are very encouraged that the results are basically in line with what our models would predict," said EQT’s Steven Schlotterbeck, president of exploration and production, during a second quarter earnings conference call on Thursday. "Until now, we've been hesitant to drill our own [Utica] well based solely on those models. We now think it's time to drill our own well."
EQT's announcement comes at a time of growing excitement about the Utica's potential outside Ohio, as its prospective boundaries push into southwest Pennsylvania and West Virginia (see Shale Daily, March 26). In addition to Range's announcement, Chevron Appalachia LLC recently tested its Conner 6H well in Marshall County, WV, at 25 MMcf/d, while several other operators are preparing to spud wells there following prolific dry gas results in southeast Ohio along the state border (see Shale Daily, May 16).
EQT has 400,000 prospective Utica acres in Pennsylvania, Ohio and West Virginia. Schlotterbeck said geologic and engineering analyses had led it to choose Greene County, PA, for its first Utica well in southwest Pennsylvania.
"The main reasons for this are the geology under Greene County looks quite good and we have existing pads, roads and takeaway pipes in place that could be leveraged if we are successful," he said. "We realize this well is an experiment and could result in a $15 million dry hole, but the upside, if successful, is tremendous. We've begun the permitting process and expect to spud the first well before year-end."
The potential is evident in Southwest Pennsylvania, especially considering that EQT had planned to drill 21 Utica wells in Ohio this year. In April, however, those plans were canceled because the results didn't meet expectations (see Shale Daily, April 25).
While the company's Ohio program is on hold, Schlotterbeck said he believed that its first Utica well in Pennsylvania could possibly be one of the deepest ever drilled in the formation, with early plans calling for a total depth of 13,500 feet.
"The [Utica] wells are going to cost twice as much as a Marcellus well, so they're going to have to produce twice as much to be competitive," he said. "They can obviously produce less than that to be economic, but given the large inventory of Marcellus opportunities that we have, our real goal is to make it compete with the Marcellus; it's not just about our cost to capital."
EQT's Utica prospects still did little to detract from what Wells Fargo Securities analyst Gordon Douthat called an "uncharacteristic" quarter for EQT. It missed both earnings per share and production estimates mainly due to midstream issues and low commodity prices.
The company reported 110 Bcfe of production, which was 4 Bcf below second quarter guidance.
"The shortfall versus guidance was due to the delay in the installation of a gathering pipeline, which postponed two multi-well pads from being turned inline and also due to the delay in construction of well lines to another multi-well pad," said CFO Philip Conti. "In total, 22 wells were delayed and all of those are currently flowing, which explains why we're reiterating our full-year guidance of 465-480 Bcfe."
In what's likely to be a broader story for many of the Appalachian Basin's leading operators this earnings season, EQT also said that net income and higher midstream gathering volumes at its affiliate EQT Midstream (EQM) were partially offset by lower than expected commodity prices. EQT and its peers have tracked the recent decline in natural gas prices linked to colder-than-normal summer weather, with many of them suffering on the stock market as a result.
EQT said that while the New York Mercantile Exchange price of natural gas averaged $4.67/MMbtu during the second quarter, its average realized price was $3.85/Mcfe --10% lower than what it realized during the same period last year. Based on current market conditions, the company is forecasting gas differentials at between $1.00 and $1.10 below Henry Hub for the remainder of the year.
Conti said that estimate was conservative, though, and added that the company should be able to chop the differential down to negative 65 cents with its firm transportation agreements to better markets.
Through its midstream affiliate, EQT announced a number of projects and deals last quarter (see Shale Daily, June 12; May 1). The company said Thursday that it was moving forward with the Ohio Valley Connector (OVC) project, a 36-mile pipeline extension connecting its transmission system in northern WV to Clarington, OH. The OVC will interconnect with both the Rockies Express pipeline and the Texas Eastern pipeline, giving the company more exposure to Midwest and Gulf Coast pricing points.
It has contracted 650 MMcf/d on the 1 Bcf/d extension, with EQM contracting with third parties for the remaining capacity. The project is expected to be in service by 2Q2016.
Financial analysts also seemed optimistic about some of the company's other prospects and didn't discount the growth it has seen in recent years (see Shale Daily, Feb. 13).
While the bulk of EQT’s production continues to come from the Marcellus Shale, where it produced 943.3 MMcfe/d in the second quarter, it entered the Permian Basin in West Texas after an asset swap with Range Resources in May (see Shale Daily, May 1). The company has also added a new development window to its core in the dry gas window of West Virginia where it will drill 18 wells this year.
In the Permian, EQT has plans to drill three wells in the Upper Wolfcamp by the fourth quarter and will "sprinkle in" tests on the Cline Shale formation and the Lower Wolfcamp next year, Schlotterbeck said.
The company's second quarter production increased 17% from the 92.4 Bcfe it averaged in 2Q2013. EQT drilled 89 gross wells during the second quarter. Fifty-five targeted the Marcellus; 11 targeted the Upper Devonian; 22 were drilled in the Huron Shale of Kentucky, and one was drilled in the Upper Wolfcamp.
The company reported net income of $110.9 million (73 cents/share) in the second quarter, up from $86.9 million (57 cents/share) during the year-ago quarter.