The Marcellus Shale will produce a record 12.6 Bcf/d in November 2013, according to the Energy Information Administration’s (EIA) Drilling Productivity Report on October 22, 2013. If the Marcellus itself were a country, it would rank eighth in the world in natural gas production – and the growth is expected to continue
Companies such as Cabot Oil & Gas (ticker: COG), Range Resources (ticker: RRC), EQT Corp. (ticker: EQT) and newly public Antero Resources (ticker: AR) have vast expansion plans expected to be fueled by the Marcellus in the near-term. Cabot, already producing more than 1.0 Bcf/d, plans to grow production by 30% to 50% next year. Additionally, Range Resources said publicly in its Q3’13 release that they believe RRC production growth of 20% to 25% per year is sustainable over the near-term.
OAG630 notes the street continues to recognize the future growth opportunities afforded by the Marcellus by rewarding Marcellus focused with premium multiples. As you can see in the chart sourced from EnerCom’s Monthly Energy Industry Data and Trends report, Marcellus players are trading at a median 2014E P/CFPS multiple of 8.3x – the highest among the basin groups.
Building out the Infrastructure
The overflow of natural gas production is prompting the construction of new pipelines, particularly aimed at supplying the northeast region. The EIA report shows a total of six pipeline expansion projects are currently under construction in the region, and an additional 19 projects have either been approved or are pending approval. Projects scheduled for completion this winter will add 2.0 Bcf/d of capacity to the northeast markets, with the number expected to surpass 3.5 Bcf/e by 2015.
The Tennessee Gas Pipeline Co.’s MPP Project was completed on September 20, 2013, and added 0.24 Bcf/d of production to its Pennsylvania markets. Spectra Energy (ticker: SE) is nearing completion of its 21-mile, $1.2 billion pipeline expansion to the New York/New Jersey area. The new line will add 0.8 Bcf/e of capacity. The increased flow will be a relief to any qualms about a shortage. The Algonquin Gas Transmission pipeline, one of the major gas lines to New England, often operated at very high rates and was approaching full-capacity in 2012.
Spectra Energy secured contracts with three operators for the expansion, including Consolidated Edison (ticker: ED), Chesapeake Energy (ticker: CHK) and Statoil Natural Gas (ticker: STO). The companies’ contributions to the output are 21%, 53% and 26%, respectively.
Regional Prices taking the Hit
Consumers are not expected to see benefits from the increased infrastructure until 2016, but the abundance of natural gas is dropping prices on a national level. Production in West Virginia reached 2.4 Bcf/d in August 2013, which is a 50% increase over its total in August 2012. Prices for the northeast have traditionally been higher than the Henry Hub spot price due to transportation costs, but the revelation of the shale boom and improved infrastructure is expected to decrease future basis prices. The TCO Appalachia, one of the region’s natural gas price benchmarks, is expected to trade at a discount to Henry Hub as early as 2014. The forward curve was originally anticipated to be discounted as early as 2012, but an unusually cold winter prevented the prices from dipping to estimated levels. Historically, the TCO Appalachia has traded $0.25 higher per million BTUs than Henry Hub.
United States spot prices still remain a fraction of prices overseas. According to the Federal Energy Regulatory Commission’s (FERC) estimated prices for November 2013, Henry Hub prices are expected to be $3.15 while the Northeast U.S. is expected to be $3.26. Europe, on the other hand, ranges from $10.40 to $10.90, and eastern Asia varie
s from $15.25 to $15.65.
Adding Fuel to the Fire
OAG360 points out that an additional production supply catalyst could continue to put a damper on natural gas prices in the short-term. As operators such as PDC Energy (ticker: PDCE), Magnum Hunter Resources (ticker: MHR), Antero Resources (ticker: AR) and Gulfport Energy (ticker: GPOR) continue to de-risk and explore the Utica Shale in Ohio, the liquid rich natural gas streams of these large Utica wells could continue to create a supply glut in the Northeast.
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