Marcellus stocks were up yesterday, with EQT (EQT) and Cabot (COG) reporting exceptional results. These results read through to other Marcellus focused stocks and companies with Marcellus exposure. They are particularly relevant to companies with Marcellus exposure that trade at a substantial discount to their peers, such as Southwestern (SWN), which has acreage in close proximity to Cabot, and Gastar (GST), which has core liquids rich acreage in West Virginia. Both SWN and GST trade at large discounts on an EV/EBITDA to Marcellus stars Cabot and Range Resources (RRC). And the results are relevant to activist targets Chesapeake (CHK) and Gale Force (OTCQX:GFPMF). Exceptional results and growth may drive higher valuations and stock prices across this group, particularly among the most undervalued (on a relative and/or absolute basis) stocks.
EQT was up 8% yesterday on the back of exceptional Marcellus results. EQT's overall production grew 47% year over year and its Marcellus production grew 103% year over year. Particularly impressively, EQT grew while generating positive operating cash flow net of capex - it spent $247 million in capex in the most recent quarter versus operating cash flow of $304 million. EQT announced excellent results in its core area in Greene county, but also announced impressive results in NW West Virginia, an area investors usually associate with Gastar and Magnum Hunter (MHR). Also, EQT may be able to proceed with the sale of its Utility business as it appears to have gotten regulatory approval to go forward. This could help unlock value to the company and make the investment more of a "pure play" on the Marcellus. It is also bringing EQT to the attention of investors in the Marcellus "pure play" of choice, Cabot, as evidenced by EQT's outperformance versus Cabot today.
Cabot was up 5% yesterday after announcing similarly exceptional growth. Also, Cabot shared some well results on its extension acreage in Susquehanna county indicating that its "sweet spot" in the Marcellus may extend further than expected. This is positive for Southwestern, which has acreage in close proximity to Cabot's extension acreage and trades at lower EV/EBITDA and EV/Reserve Value multiples.
Yesterday mid day, Range Resources was up 4%, Gastar was up 4% and Rex Energy (REXX) was up 4%. These Marcellus stocks appear to be trading in sympathy with EQT and COG despite no news on them yesterday. They each have exposure to a sweet spot in the Marcellus and the market may be pricing in the possibility of similar rapid growth to EQT's and COG's. However, unlike EQT and COG, RRC, REXX and GST have been focusing on developing liquids-rich Marcellus, which has more attractive economics in a low gas price environment. And of this group, Gastar may have the most upside, as it just discovered and gained substantial exposure to an oil play in Oklahoma. Gastar appears to be "catching up" on a valuation basis over the past few months, as litigation overhang has been removed and production continues to ramp substantially. At ~6.7x EV/2013 EBITDA, it trades at 2/3 to 1/2 of the multiple of its Marcellus focused peers like COG, RRC and REXX, so there may be significant additional "catching up" for GST stock.
Even Chesapeake was up 1.5% yesterday. Chesapeake has Marcellus exposure but its exposure there has been overshadowed recently by investor activism, management turnover, and investor and management focus on the Eagle Ford and Utica. Chesapeake has some acreage in Susquehanna near Cabot's recently announced well results. Considering recent divestitures by CHK, perhaps the company will divest its asset in the area, taking advantage of higher natural gas prices and increased awareness of the value of that area.
And apparently the exception to this trend of higher Marcellus stocks is Gale Force Petroleum, which was down yesterday on limited volume (on the TSX-V exchange). This was despite a letter to the board yesterday from the company's largest investor, indicating that the investor sees significant value - $83 million in 2P reserves, versus a current enterprise value of under $15 million - that they believe could be unlocked through a change in management and board composition. In that letter, the investor highlight's Gale Force's highly successful investment in the Marcellus, where a relatively small capital investment has led to relatively substantial production at attractive rates of return. Gale Force's field is in Wetzel county, nearby where EQT announced excellent well results yesterday.