COMPANY DESCRIPTION:
Magnum Hunter Resources is an oil-leveraged
independent oil and gas company, engaged in low-risk
development and exploration in the Williston Basin and
Appalachian Basin (Marcellus and Utica Shales).
MARCELLUS AND UTICA LEADING THE CHARGE
Investment recommendation
MHR has built solid asset bases in the Marcellus and Utica Shales as
well as the Williston Basin (WB). We believe a renewed focus on the drill
bit and deleveraging the balance sheet (with further asset sales) should
continue to act as positive catalysts for the stock going forward. Investment highlights
Growth continues to be driven by the Marcellus and Utica. The
company expects to bring on a third rig here in the near future, and
wells targeted to be brought online between now and YE 2014 are
expected to add ~31 MBoe/d in net production; this is greater than
the company’s entire output from continuing operations in Q1/14.
MHR remains comfortable with its 2014 production exit rate
guidance of 32.5 MBoe/d from continuing operations.
MHR continues to build up the value of its Eureka Hunter
midstream business. As of April 2014, the Eureka Hunter’s
gathering flow through recently hit a peak rate of 236 MMcf/d. With
the completion of expansion projects currently under construction,
the company expects that Eureka Hunter will have a throughput
capacity of 1.2 Bcf/d by YE 2014.
The company has done a good job enhancing its liquidity. As of May
6, 2014, MHR had total liquidity of ~$131.2M. To further enhance
its liquidity, the company is pursuing additional non-core asset
sales. It expects to close such potential sales throughout the
remainder of 2014. MHR has already sold its Canadian WB assets
for US$68M, which is expected to close this week.
Valuation
Our $10 price target represents a 20% discount to a ~$12.50 NAV
COMPANY DESCRIPTION:
PDC Energy is an exploration and production company with operations in the DJ Basin of Colorado, the Utica Shale in Ohio, and the Marcellus Shale in West Virginia.
PDCE Q3 REVIEW: HEADLINE EPS MISS HIDES STRONG POSITIVES; MAINTAIN BUY, $80 PT
Lower prod causes EPS miss but 2014 guidance maintained PDCE’s Q3 Adj. EPS of ($0.07) missed consensus EPS of $0.22 (CG $0.16), primarily led by lower production and associated higher unit costs. Total production of 18.6mboepd missed guidance of ~19.5mboepd, and the shortfall was largely due to impact from CO flooding, Utica mid-stream issues, and a delay in hooking up pad drilled Marcellus wells. Despite that, PDCE maintained FY13 production guidance of 19.2-20.5mboepd, largely
due to expected contributions from 9 Utica and 16 Wattenberg wells. This also indicates higher oil yield in Q4 sequentially.
Headline IP hides the true merit of the Garvin well In our view, one of the most important slides of the call displayed the
3-stream IP vs. choke size .
As we understand, PDCE can allow unrestricted flow at >3mboepd that declines hyperbolically, or to preserve well integrity, flow at 20/64 choke, and maintain flat prod at ~1,500boepd. For comparison, GPOR had reported the Wagner 1-28 on a
32/64 choke at ~2,600boepd. At similar choke size, assuming the same casing pressure, Garvin could report ~3,500boepd. In any case, in our view, the 750mboe EUR could be way too conservative.
In Wattenberg, PDCE discussed early results from 8 of the 16 wells drilled in the Waste Management section. Notably, although the pilot was drilled in Outer Core, Niobrara results reflected Middle/Outer Core. Further, with the easing of high line pressures (Fig. 2), we see PDCE embark on full-scale pad development in Niobrara/Codell in the Middle/Inner Core where EURsimprove .
Finally, we think PDCE’s comment on higher GOR in Codell is expected moving into the core, but notably, Codell wells are exceeding management’s curve . Weakness caused by EPS miss presents a buying opportunity
Overall, the headline EPS miss caused a ~5% underperformance that we believe presents a strong buying opportunity. Reiterate BUY, maintain price target of $80
2H13 ETHANE PRODUCTION RAMP — A MINOR VALUE DEDUCT
COMPANY DESCRIPTION:
Range Resources is an exploration and production company with assets in the Anadarko, Appalachian, Permian and Williston Basins. Investment thesis
We our lowering our target price $5 to $72 per share due to a ~5% higher capital allocation toward gas (~$3/share) and the second half ‘13 commencement of Marcellus ethane production (~$2/share).
Specifically, the company anticipates producing ~5 Mbpd of ethane via transport to Sarnia, Ontario in the 2H13 and ~15 Mbpd of ethane in early ’14 via transport to Sarnia, Ontario and Mont Belvieu, Texas. As the ethane price net back is ~50% of natural gas, selling Marcellus ethane in North America has a negative impact of ~$2 per share.
Our target price is anchored on a $5.25 long-term NYMEX gas price, which is only modestly above the gas price reflected in E&P equities. RRC offers twice the CFPS growth prospects of the sector (’13-’15E) though trades at twice the expensiveness (’13E EBITDA). Investment highlights
Marcellus, New York (Photo credit: Dougtone)
Liquids-dominant Marcellus footprint: In SW PA, about 110,000 net acres of the company’s Marcellus leasehold is “super-rich” (1,350+ Btu/Scf), ~220,000 net acres is “wet gas” (1,050-1,350 Btu/Scf) and ~210,000 net acres is “dry gas” (<1,050 Btu/Scf). In NE PA, Range has ~145,000 net dry gas acres. Super-rich wells (~3,900’ laterals, ~18 frac stages) recover ~1.4 Mmboe (~60% liquids) and wet gas wells (~3,200’ laterals, ~13 frac stages) recover ~1.5 Mboe (~50% liquids) for a cost of $5-$6 million. Superior Mississippian well performance: Mississippian wells (~3,600’ laterals, ~19 frac stages) along the Nemaha Ridge have commenced production at ~500 Boepd and averaged ~400 Boepd the first 30 days and recover ~400 Mboe (33% oil, 33% NGLs, 33% gas) for a cost of ~$3.5 million
Investment thesis
We reiterate our HOLD rating though increase our target price $4 to $61 per share due to an upward re-calibration of 2H/12 production along with slightly higher capital spending/productivity. Our target price is anchored on a $5 long-term NYMEX gas price, which is only modestly above the gas price generally reflected in E&P equities.
To illustrate our value challenge, EQT trades at a ~25% premium (‘13E EBITDA) to the group though CFPS growth (’12-’14E) is only modestly above the sector. Accordingly, we retain our HOLD rating as we believe EQT is fairly valued near current levels . Investment highlights
Impressive production growth outlook: Underpinned by Marcellus development, EQT anticipates generating ~32% production growth this year (257 Bcfe) and ~31% growth in ’13 (335 Bcfe). We upped our ’12 production expectation almost 2%, while our ’13 production outlook increased an unusual ~7%. Our ’12/’13 production forecasts are in line with company guidance.
Highly competitive Marcellus gas well productivity: In Greene County, a 10-well pad commenced production at average initial rate of 10-12 Mmcfpd per well, implying a recovery of ~6 Bcfe per well for a cost of $6+ million. In ’12, EQT is conducting a five-rig program and plans to drill ~130 horizontal Marcellus wells. In 3Q/12, the average Marcellus well lateral length was ~5,800’ (25-30 frac stages). The company has 27 wells (~620 frac stages) waiting to be turned in-line. Net Marcellus production averaged 451 Mmcfepd in 3Q/12 and should exceed 700 Mmcfepd at year-end ‘13.
English: To create this SVG-format logo, I took the EPS file at Brandsoftheworld.com, ran it through pstoedit, and then did the following modifications using Inkscape and Notepad: fixed priority (center of “O” in “Exxon”), centered on a correctly sized grid, and made markup simpler and more readable. Used in Exxon. Source: http://static.seekingalpha.com/wp-content/seekingalpha/images/thumb-Exxon_01.jpg Category:Oil company logos (Photo credit: Wikipedia)
August 30
I have written before on the great articel Fortune Magazine published on Chesapeake – prior to the public debacle . It pointed out that Chesapeake had committed itself to thousands of deals requiring , not only lease payments but continued drilling to maintain the leases.
As a result Chesapeake is producing natural gas and having to sell it at a price lower than its cost of production. A new article by Richard Zeits says that Exxons reaction to the low natural gas price is to cut its gas drilling to the absolute minimum. This will mean abanding leases and having to reduce its potential reserves – someting Exxon has been loath to do . Exxon has been criticized in the past as demanding too high an internal rate of return – and thus leaving aside potential .
However, the very great fiscal discipline it dispalys is sorely lacking at its competitors. The strong shift in its operating priorities, even at the cost of losing some of its valuable gas acreage, may indicate Exxon’s negative outlook on the US natural gas fundamentals both in the short and the long term.
This is even more dramatic considering the very leases Exxon may abando are in the areas others covet – – the Marcellus and Fayetteville.
In the Marcellus, Exxon has approximately 660,000 net acres under lease. Last summer, Exxon substantially expanded its acreage in the play by acquiring two privately held Pennsylvania operators, Phillips Resources and TWP, for $1.7 billion. The acquisitions added 317,000 net acres to Exxon’s existing Marcellus position which stood at 390,000 acres at the end of 2010. To date, Exxon’s Marcellus drilling program has been somewhat slow relative to other operators such as Range Resources (RRC) and Chesapeake Energy (CHK) who also have very large leaseholds in the play.
Liquefied natural gas (LNG) tanker, section view from front. (Photo credit: Wikipedia)
By Vaclav Smil
Before the end of 2005, the U.S. price of natural gas rose above $15 per thousand cubic feet (mcf), nearly 12 times the record low reached in 1995. Production was down by about 8% compared to 2001, news reports speculated about supply shortages, and gas companies were gearing for expanded imports of liquefied natural gas (LNG) from overseas. Six years later, by the second week of April 2012, the market price of U.S. natural gas fell to less than $2 per mcf (to levels not seen since January 2002), nationwide gas extraction in 2011 was nearly 12% above the 2009 level, and record production was expected in 2012, when all storage sites would be filled to capacity. No wonder that gas companies are now planning to export LNG, and that new drilling projects have been shelved in the anticipation of gas glut.
This amazingly abrupt change of gas fortunes has been due to the rising production of shale gas. Shale gas is released by horizontal drilling followed by hydraulic fracturing of the porous rock using proprietary high-pressure mixtures of water and chemicals (the practice now widely known as fracking). Rising consumption of natural gas will eventually make it not only more important than crude oil but the single-most important fossil fuel.
Too good to last? Critics say so. They point to a substantial downward revision (roughly a two-thirds reduction) of shale gas reserves in the Marcellus formation that underlies the Appalachian states from West Virginia to New York. They claim that the industry is nothing but a variation of a Ponzi scheme, for example, Rolling Stonemagazine. They note that the gas flow from new wells declines exponentially in a matter of months. Their most often repeated argument is that fracking is a huge environmental disaster that will contaminate aquifers wherever it takes place.
Here is my advice. Do not get carried away either by bonanza claims (implying only sinking natural gas prices and seeing Marcellus as the Saudi Arabia of natural gas) or by the negativism of anti-fracking activists (recently joined by Hollywood celebrities). Low prices will slow the development of shale gas. Reserve estimates of any mineral resource are always uncertain during an early stage of development (in 2011, the U.S. Geological Survey boosted its estimate of technically recoverable Marcellus gas more than 40-fold compared with its 2002 figure), and even conservative assessments point to a combination of already available reserves and the most likely additional resources that would suffice (at the current rate of consumption) to supply America for at least the next 50 years.
As for Rolling Stone’s accusation that Chesapeake Energy is running a Ponzi scheme, that company has responded in detail. Although many questions remain about the company’s actions, even if the worst suspicions are proven they do not invalidate long-term viability of shale gas extraction. Exponential decline of gas flow from fracked wells is a well-known phenomenon, taken into account by such pioneers of shale gas development as Terry Engelder at Penn State when they made their estimates of potential recovery. And if there is any water contamination, it is a problem that has well-known technical solutions.
Global LNG trade rose roughly eightfold between 1980 and 2010, and it now accounts for 30% of the worldwide natural gas trade.
All of these have been fascinating, often controversial, and newsworthy developments, and while I would not dismiss them as altogether ephemeral, I see them largely as expected ups and downs along a long trajectory of national and global energy transitions. These transitions are slow but inexorable shifts in the amounts and proportions of different primary sources of heat, light and motion, and while they may be slowed down or accelerated (and temporarily even seemingly derailed), there is no doubt about their long-term persistence and eventual outcomes.
By the end of the 19th century, traditional biomass fuels (wood, charcoal and straw, which together dominated energy use for millennia) were reduced to a small fraction of overall energy supply as coal became the principal fuel. The shift away from coal to hydrocarbons (crude oil and natural gas) began slowly before 1900 in the United States and Russia, and it accelerated only after the Second World War. By 1970, crude oil supplied 46% of the world’s energy and its shares were 43% in the United States and 50% in Europe. There is no mystery about what will come next: Rising consumption of natural gas will eventually make it not only more important than crude oil but the single most important fossil fuel.
Seen from this perspective, U.S. shale gas production must be viewed as only one, albeit a major, component of gas’s global rise. In 1970, natural gas supplied 18% of global commercial energy and that share rose to about 24% by 2010 (with the EU share going from less than 8% to 26%), while the worldwide crude oil share fell from 46% to 34% (and in the EU from 50% to 38%). Natural gas’s rise has been slowed recently by China’s extraordinarily high coal extraction rates, but these cannot be repeated in the future (the country is already a large importer of coal). Natural gas will thus continue its conquest of global and national energy supplies, with five factors behind the rise — discoveries of new large fields, diffusion of shale gas production, expansion of LNG exports, high prices of crude oil, and unrivalled efficiency of gas converters.
Do not get carried away either by bonanza claims or the negativism of anti-fracking activists.
New giant gas fields have been discovered in such previously unpromising places as the Mediterranean off Israel’s shores and deep Atlantic waters offshore near Brazil. There are extensive deposits of gas-bearing shales in Europe (particularly in Poland) and enormous resources in Asia. Recent reductions in the cost of gas liquefaction coupled with increased sizes of LNG tankers (they now rival the size of ships carrying crude oil) made LNG into a trade equivalent of oil: It can now be transported to consumers on any continent, bought without restrictive long-term contracts, and delivered at increasingly affordable prices. The totals speak for themselves: Global LNG trade rose roughly eightfold between 1980 and 2010, and it now accounts for 30% of the worldwide natural gas trade.
Little has to be said about high oil prices (the price spread between liquid and gaseous hydrocarbons has reached an unprecedented level), but the conversion efficiencies achievable by furnaces and turbines burning natural gas are not sufficiently appreciated. New, super-efficient household gas furnaces convert up to 97% of the fuel into heat; combined-cycle generation (using the waste heat from a gas turbine to raise steam and generate more electricity in an associated steam turbine) now produces electricity with 60% efficiency (and 70% will be possible in the future).
Modern (that is, overwhelmingly fossil-fuelled) civilization needs highly concentrated sources of energy that can be conveniently delivered to the megacities where most of humanity will soon live. No other fuel can fit this need as efficiently and with such a relatively low environmental impact as natural gas (its combustion releases less carbon dioxide per unit of useful energy than coal or oil). The conclusion is obvious: The world should speed up its unfolding transition from coal and crude oil to natural gas by using the fuel not only for heating, electricity generation, and as feedstock for industrial syntheses but also as a transportation fuel. Spending toward that goal would bring faster and more durable gains than subsidizing such dubious conversions as turning corn into ethanol or pouring huge sums into money-losing solar enterprises.
Drilling inventory surges; remains top gas-weighted idea
Thesis
Following minor model refinements. Cabot’s capital productivity is almost twice
the peer average (EQT, RRC, SWN and UPL). Our ’13 estimates clearly
demonstrate the power of the company’s productivity. Next year, we believe
Cabot should generate almost 4x the production growth while spending almost
40% less than cash flow as the peers spend ~30% beyond cash flow. Accordingly,
we see ~40% upside to COG shares even in a long-term $4 gas price environment
while EQT, RRC, SWN and UPL have ~30% downside potential in this bear-case
scenario.
Highlights
Marcellus locations increase ~50%: Five Marcellus wells seven miles east of the nearest production averaged 15+ Mmcfepd over the first 20 days. This iscomparable to ’10/’11 Marcellus wells and suggests a well recovery of ~11 Bcfe in our view. Our estimate of remaining core Marcellus locations rose ~400 to ~1,300, which represents a 15+ year drilling inventory at the ’12E
pace. These estimates are predicated on 100-acre spacing.
Cabot is testing 50-acre spacing.
Eagle Ford locations double: Two recent Eagle Ford downspacing tests (55-
acre spacing) each commenced at almost 800 Boepd, in line with prior results
and implying a recovery of ~400 Mboe.Our estimate of remaining Eagle Ford
locations doubled to ~400, which represents ~15 years of drilling inventory at
the ’12E pace.
Long laterals improve productivity: Two long lateral Marcellus wells should
each recover ~17 Bcfe for $7+ million. These relationships imply an
improvement in capital productivity from ’11 levels.
Apprentice Millionaire Portfolio 
