At the DUG East Conference held earlier this week, Sterne Agee analysts Tim Rezvan and Truman Hobbs found plenty of reason to be optimistic about new exploratory wells in Utica and Marcellus shale formations, but short takeaway capacity could limit near-term growth.
“The key theme emerging was widespread operator bullishness on the next stages of development in the Marcellus/Utica across Appalachia, which appear to be leading to optimal development of the stacked pay potential of these formations across eastern Ohio, West Virginia, and Pennsylvania,” write Rezvan and Hobbs.
Marcellus test drilling moving west into Ohio
For one thing, they report that companies are drilling across a wider area than they had realized, particularly moving West into Ohio for exploratory Marcellus drilling. CONSOL Energy Inc. (NYSE:CNX) is drilling a stacked test for both Marcellus and Utica in Monroe County, Ohio and Gulfport may follow suit with its own Marcellus test well. Gastar Exploration, Inc. (NYSEMKT:GST), Chesapeake Energy Corporation (NYSE:CHK), Magnum Hunter Resources Corp (NYSE:MHR), and Stone Energy (SGY:NYSE) are all running tests in West Virgina and Range Resources Corp. (NYSE:RRC) is drilling a test in Pennsylvania.
Depending on the results of all these exploratory wells, Rezvan and Hobbs think that companies in the region might have to reconsider how they want to develop operations in Appalachia.
Rice Energy Inc (NYSE:RICE) has plans to drill another 11 wells in Ohio before the end of this year, and early expectations are for test flow rates of at least 50 mmcf/d based on results from other wells in the same area (Bigfoot 9H). Rezvan and Hobbs also noted that Rice Energy’s completion recipe (which uses more sand than other approaches and some ceramic proppant) is quickly becoming standard procedure for other companies operating in the region.
Takeaway capacity still a near term concern
Operators were also saying that the stacked pay potential (hitting both the Marcellus and Utica at different depths with the same well) could help ease logistics because mixing the wet gas from Marcellus with the dry gas further down from Utica would reduce the amount of processing necessary to produce pipeline-ready gas. While saving money on processing could help margins, Rezvan and Hobbs point out that it doesn’t do anything to increase pipeline transport capacity.
Bringing another productive gas formation online will increase capex as companies spend more on compression and are forced to reorganize local gathering lines that transport gas to the larger interstate pipelines. This local transport capacity could be the chokepoint that holds back growth in the short-term.