As for the Marcellus, it’s developing rapidly, but it’s still a good ways from play maturation, he adds.
Amongst resource plays, next in line for advancement, since the Barnett, into oil- and gas-producing MLPs’ portfolios is the Fayetteville shale play, followed by the Haynesville, says Jonathan Hough, director, energy investment banking, for BMO Capital Markets.
On a scale of resource-play maturity-that is, its advancement from science experiments and early exploration to more of a methodical, manufacturing mode-the original shale play, the Barnett in the Fort Worth Basin in North Texas, is the most advanced, Hough notes. He presented to attendees at Hart Energy’s workshop in Pittsburgh on Marcellus and Utica finance and M&A, preceding the fourth annual DUG East conference.
Already, EV Energy Partners LP and Atlas Resource Partners LP have bought into the Barnett, which was proven by Mitchell Energy & Development Corp. in the late 1990s. Also, Fort Worth-based Quicksilver Resources Inc. plans to form an MLP, Quicksilver Production Partners LP, for the purpose of dropping into it its developed Barnett portfolio.
Meanwhile, the Fayetteville in Arkansas that was founded by Southwestern Energy Co. in 2004, hosts one MLP, Vanguard Natural Resources LLC, already. The Haynesville in northwestern Louisiana that was proven in early 2008 by Chesapeake Energy Corp., hosts Memorial Production Partners LP.
MLPs (master limited partnerships) are built to produce oil and gas-paying out earnings as pre-tax distributions to investors-and exploit known new-well targets, rather than to explore for oil and gas as do traditional E&P companies. “Basin maturity is critical to meet the MLP model,” Hough says.
Next on the MLP course? Far along, but still needing more capital-intensive investment and further de-risking, are the Marcellus, Bakken/Upper Three Forks, and Eagle Ford condensate window, Hough says. These remain best suited to traditional E&P companies, including slightly lower-risk-taking public-equity-backed E&Ps.
“The Marcellus is still in early-stage development versus the Barnett, which has matured,” Hough says. However, it is advancing much more rapidly. “It took more than six years for Barnett production to grow from 1 Bcfe (billion cubic feet equivalent) a day to 5 Bcfe a day.” Meanwhile, Marcellus grew to that rate in only two years of exploration and he estimates there are still 100 years of drilling left to be done in the rock at the current pace. In contrast, drilling inventory in the Barnett has declined to a 30-year supply, particularly at the current-gas-price pace.
Another distinction is that Barnett wells hit their MLP-appropriate decline rate-some 10% a year-in their fifth year of production, while Marcellus wells might not reach this until their seventh year.
And, existing Marcellus producers are not motivated to sell: Keeping exploration companies at work there-rather than casting off this inventory to MLPs as a means of funding a next great play-is that they can better afford to do this there than in the Barnett.
At a $4 gas price, Marcellus wells produce an average 44% internal rate of return (IRR), Hough says; Barnett, 28%. At $5, the Marcellus generates an average 75% IRR; the Barnett, 54%.
“Given strong economics of the Marcellus, producers are likely to continue development drilling. Monetizations will be more frequent as the basin matures.”
For most MLPs, they want more Marcellus production results to define areas with high concentrations of PDP (proved, developed, producing) reserves that are ready for infill drilling. Meanwhile, there are plenty of other, mature property packages for them to consider in basins elsewhere, he adds.
“Buyers and sellers agree that MLP M&A activity in the Marcellus will happen, but it’s too early,” Hough says.
For potential Marcellus sellers, they still have plenty of wells to drill, the Marcellus has superior economics and they can divest properties elsewhere to continue to fund Marcellus exploration. “Currently there is no pressure (for a producer) to find ‘the next asset’ to replace the Marcellus.”
The Marcellus itself is still a next, great asset. He notes that Range Resources Corp., which founded the Marcellus play in 2007, sold its Barnett acreage and production under and around its Fort Worth headquarters in just 2011 to fund development of its new Marcellus play.
Last in line for MLPs? Resource plays best suited to remain in the hands of public-equity-funded E&Ps-in terms of continued nascence, thus higher capital risk-for some time longer are, in order of most to least risk,
–The Lower Three Forks formations, which sit under the Bakken/Upper Three Forks play in the Williston Basin and hosts only a few wells yet, albeit each highly successful,
–Cline and Wolfbone in the Permian Basin,
–Utica in Ohio and northwestern Pennsylvania,
–Niobrara in eastern Colorado and Wyoming,
–Eaglebine in southeastern Texas,
–Bone Spring/Avalon in the Permian Basin,
–Mississippi Lime in northern Oklahoma and southern Kansas,
–Horizontal Wolfcamp in the Permian Basin, and the
–Eagle Ford oil window.
Perched on the border of being best suited for a traditional E&P-either publicly or privately funded-is the Eagle Ford’s dry-gas window, Hough says.
Drilling inventory? Hough estimates the
–Marcellus’ 15 million acres have 175,000 locations remaining to be drilled or a 100-year inventory at a rate of 1,650 wells a year,
–The Eagle Ford, across all windows, consists of some 10 million acres with 100,000 remaining locations or a 40-year supply,
–The Haynesville, 3.5 million acres, 50,000 locations remaining or a 50-year inventory, and
–The Barnett, 4 million acres, 30,000 wellsites remaining or 30 years.
“As (traditional E&P) C-corps continue developing new resource plays, legacy assets in blow-down stage will be divested, and MLPs are likely buyers,” he concludes.
But not just yet for most.
NOTE: For news tweets from DUG East 2012, search #DUGEA2012.
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