Alan Farquharson – Senior VP, Reservoir Engineering & Economics
Range Resources Corporation (RRC) 2013 IPAA OGIS Conference Call October 1, 2013 7:25 PM ET
Hi everyone. I'd like to introduce Alan Farquharson, Senior VP, Reservoir Engineering & Economics from Range Resources.
Thank you very much. It's great to be here and be able to tell the Range story. Before we get on with the story, obviously though we have to cover the legal side of the equation, always talk about the forward-looking statements. So I'll -- I'm not going to read those, just everyone who wants to know, I'll just let everyone read them within the book before we get telling about the story.
The strategy of Range has been relatively consistent probably over the last decade, and it's really been focusing on per share growth of production reserves on a debt-adjusted basis. And so, what we're doing is, we continue to build and high-grade the inventory. I'll talk about some of the things we've done over the past decade to help us really reinforce this building and high-grading the inventory.
The key thing is being able to do it while maintaining a strong financial position, so we can thrive in any type of price environment that there is, and of course the third point that's very important to Range is continue to operate safely and be good stewards of the environment, and I'll have a slide or two to talk about that.
Range looking forward, it's a great history so far, and I'll talk about production here in just a minute, where we've been. But the track record looking forward looks outstanding -- 20% to 25% growth for many years. You could think about that, and if you get to the high end of the growth target that means essentially you're going to be doubling every three years through the compounding effects. So, we'll double production in three years and then potentially double production again in six years, and then continue after that. It just doesn't stop after six or seven years due to large resource potential that we have, it's nine to 13 times our proved reserves.
I think at the end of the day -- and cash flow as long as the strip continues to hold, cash flow should grow at or above what production growth is going. So, it's really the basis of the Marcellus at the end of the day -- large position, repeatable, low risk, high rate of return projects that generate phenomenal growth.
The financial position that we're in currently, obviously, so we're in a strong position. It's something that we really focus on, and we treat the financial position comparably to how we treat the operational side of the business with a tremendous amount of discipline.
You know, while we have bank debt, subordinated debt, and some common stocks, available liquidity, $1.4 billion under our existing facility, you can see that most of the maturities -- our long-term maturities don't start expiring until -- occurring until 2019. And as a result, when you have a position like we have in terms of assets, the growth potential we have, as well as the financial position, we've been active hedgers. That always allows us to be able to lock in cash flow, to be able to fund the capital program that we want to look at.
I mentioned earlier we focus on per share growth and on a debt-adjusted basis, and you can see what our track record looks like over the past five years, somewhere in the 15% to 20% production per share and reserves per share growth. So, significant growth, really focusing on it aligning ourselves with the shareholders.
Historical production has grown about 19% over the past 10 years as you look at this thing. This is why we've been selling approximately $2.3 billion worth of assets, so significant amount of assets growth, talks about continuing to build and high-grade the inventory. We don't fall in love with the properties we have, we -- if we can find a better opportunity for it and be able to replace the cash -- the capital associated with that and refund in the high-return projects, that's what we continue to do. For 2013, we believe we're going to be at the high end of our growth target of 20% to 25%, sovery much aligned with what our future expectations are.
Key points to the slide in terms of reserves and the resource potential, obviously everyone wants to talk about the 60 to 83 Tcfe of resource potential that we have and how that compares to what our proved reserves are. At the end of the day, I think there's two really key points here that everyone needs to look at and think about.
Number one, this is probably the lowest risk resource potential we've ever had in a company, and it's the largest resource we've had. More importantly, though, in the last three years, we moved 4.7 Tcf reserves of resource potential into proved reserves. So, you can see that the resource opportunity we have is very low risk and it continues to get better and better, and we continue to have better and better results as a result of that.
Let's talk about Range and what's going to drive the growth for the company. At the end of the day, it will be the Marcellus that's going to lead the way. Range has approximately 1 million acres of prospective for shale in Pennsylvania. And when you look at it, it really kind of -- it really almost looks like 2 million acres, because of the stacked pay potential of what we have with both the Marcellus, the Utica, and the Upper Devonian. When you look at the acreage and put all the horizons together, you're up to almost 2 million acres.
What's unique about that though is only in southwest PA, primarily in Washington County where acreage position as well as some in Allegheny right around it is where you get all three reservoirs stacked on top of each other. That gives you tremendous hydrocarbons in place and tremendous resource opportunity to be able to grow. And of course, it will really impact us down the road in terms of infrastructure and in terms of costs because you'll continue to be able to re-utilize the existing infrastructure you have.
So let's take that million acres and let's just talk about the southwest part of the play right now. In the southwest, we have 540,000 net acres. As you can see on this map here, the blue dots represent all the Marcellus wells that have been drilled, approximately 2,000 wells within this area. So the acreage has been significantly de-risked. Obviously over time, well performance continues to -- has continued to improve. But more importantly, the lateral lengths get longer, people's knowledge of the reservoir continues to get better, and results continue to improve. So it's very highly prospective, very low risk, and we have a tremendous amount of production history on it.
As you take -- as you kind of pare down that southwest area, you start looking at, okay, what can this thing really be and where are we today? As you can see, we drilled a very small percentage of our acreage. Now if we assume that this is all on a 1,000-foot spacing which everyone traditionally equates about 80-acre spacing, it says that we've drilled about 7% of our acreage. And that's based upon the wells drilled to what the potential wells are. I'll talk here a little bit later in the presentation about the down space or the tighter spacing that we've done, and if you believe that tighter spacing can be put throughout the entire acreage, you could see that that number is going to go down significantly farther.
The other metric you can gain from this slide is, while it's kind of simple -- cocktail math to kind of do, if you were to drill all the wells at one time and put them all on at one time, which of course we don't -- we're not going to do, and you multiply that by what our current production is, you can get to about 7.5 Bcfe of production on just 1,000-foot space wells. So, significant amount of resource. That's why we're comfortable -- very comfortable with the fact that we can double production and we can continue to double production for several years to come.
Now I'll take the 540,000 acres and let's split it into each one of the areas that we have. Obviously you can see on this slide we have the super-rich which is about 110,000 acres. I'll talk about the wet gas area next, and then finally talking about the dry gas only in southwest PA. This is an area that we continue to see improved well performance, in fact I'll make that statement in all three of the areas in southwest PA.
At the end of 2012, we had 51 wells that were longer laterals, defined as over 3,000 feet that averaged about 3,900 feet in 15 frac stages. All those wells were completed with RCS, and as a result of that, we just reduced cluster spacing which essentially means we're just contacting more reservoir rock. By contacting more reservoir rock at the end of the day, what we're hoping to do is increase productivity, and you'll see the results of that.
Well, we came up with new reserve forecasts, new production forecasts based upon that. And in the first quarter of 2013, we completed 17 wells in the same generalized area. As you can see, production from those wells are significantly above the forecast of the earlier wells. In fact, if you look at this thing and you go through the math, it's actually running about 50%, 45% to 50% above what the original 52 wells have been done. Once again, this is a result of improved technical work done by our technical in terms of where u land the wells, how you complete the wells, and how you drill the wells at the end of the day. So, tremendous results and it continues to get better and better.
The other thing we did earlier this year is because with so much activity and so much differentiation that people are doing in terms of lateral length stages and all these other factors that are out there, we want to at least put out, here's what we've done, the economics have been phenomenal, and here's what we're going to do going forward to be able to enhance the economics.
I think one of the key parts of this slide though is the recovery per thousand foot of lateral. This way gives everyone a metric to be able to compare everyone to each other. What you see on the other portion of the slide is horizontal length going up, stages increasing, EURs increasing. And in this case, the average EUR per thousand foot is increasing a little bit, and we have a slide a little bit later that will compare all three of these things. As a result, you're going to get 1.8 million barrels of oil equivalent, which is about 10.9 Bcfe if you put it that way.
You can see the super-rich -- the reason why we call it super-rich is you are generating over 100,000 barrels of condensate, and generates great economics.
As I move to the west, this is where the play actually started for Range, and the original wells were drilled in this area. As you can see, the blue dots on here represent the well -- the actual wells that were drilled. We had over 200 wells of varying lateral lengths over the last several years. By the end of 2012, we had 62 wells on which had longer laterals. And this is the type of -- this is the type of wells we're going to be drilling going forward, currently drilling and going forward.
As you can see from this, once again, increased recovery, to be able to maintain recovery per thousand foot, and overall EURs are going to be increasing over time. Once again, it's just part of the overall evolution.
When we talk about lateral lengths on this slide, let me point out, that's going to be the average. So, it's going to be a mixture of wells of what we're going to drill. Some are going to be a little bit longer, some are going to be a little bit shorter, and it . It all comes down to how you put the jigsaw puzzle, the surface acreage together with the lateral lengths that you and where you can build your pads.
As a result, obviously great economics as well, a little bit higher overall recovery, 12.3 Bcfe. As you can see, a little bit lower in terms of condensate. And once again the economics are outstanding under a strip of over 100%. So, great results, continued improvement as good as what we've been in the past, we continue or able to prove on it going forward.
Then finally, the dry gas area which is very large for a couple of 100,000 acres. We haven't really been as active in the dry gas area for a couple of reasons. Number one, a lot of our acreage is already HBP. As we continue to move forward, longer laterals and RCS completions, we continue to see enhanced recoveries. As a result of that activity, we'll continue to increase as infrastructure gets built out to us.
I think what you see here on this first bullet, 56% of the dry gas wells in the Marcellus are greater than 5 Bcf or greater. The dots on the map represent, the red dots represent significantly larger wells greater than 10 Bcf, while the other dots, the purple dots, represent just 5 Bcf. So what you see is a significantly de-risked portion of Range’s acreage with 5 and 10 Bcf wells surrounding a lot of it.
Once again, what you see, great well performance, great recoveries. We're going to be moving to 5,000-foot in the dry gas area as we continue going through the process. Recovery per thousand foot still to an approximately 2.5 Bcfe per thousand foot. Great results, comparable really to what anyone else is able to put together in the industry that you've seen. And at the end of the day, great economics.
So you continue to see us balance our portfolio between the opportunities we have and have great opportunities to be able to run with for years to come. That's why, once again, we're very excited about the growth opportunities we have.
This economics slide compares all three areas, and essentially what you see is the rate of return is very comparable for all three areas, and And once again the recovery is very comparable. And if you look at it per EUR per stage, once again very significant, very comparable results in terms of recovery as well as well costs. So, it tells you at the end of the day, with these great returns, we will continue to see a balanced approach in terms of development going forward.
You know, the other thing we talked about on our second quarter conference call is tighter spacing. We had received several questions about that. And what Range did about -- did three years ago is drilled a couple of 500-feet space pilots between -- 500-feet space well pilots, so we have enough well penetrations with enough well control around to be able to make a solid determination. And early on the, you know, the exciting thing about it is that the recoveries are 80% of what the thousand-foot wells are. So, really suggesting there's a significant amount of growth vehicle coming from just tighter spacing. What that equates to be in terms of resource is 12 to 15 Tcfe from just the wet and super-rich.
Now, what you've heard me probably talk about a little bit earlier is the fact that well performance continues to get better and better. We probably did not optimally land these wells or complete these wells that were on tighter spacing. So, we really think that this upside is really going to be significant and can be a growth driver for Range down the road. The key thing though is, once again, it gives us a tremendous amount of flexibility of being able to continue to meet and exceed that 20% to 25% growth for a lot of years.
We also really didn't assign any valuation at this point in time to the dry gas area since we haven't drilled any wells. This slide just really shows the actual well performance, and you can see that the 500-foot wells are tracking very well with the 1,000-foot wells, which once again gives us additional support in terms of our recovery estimate.
The question that always comes up too is what's the impact of wet gas and what are we going to be doing going forward? As most of you know, we're going to start -- we commenced ethane sales in line pack for Mariner West this month. And what this really shows is, hey, a dry gas well on a per Mcf basis, per well-head Mcf basis, dry gas well in the uplift, I think everyone fully understands associated with liquid-rich plays generates a significant uplift. And then, when all three of our ethane deals are in place, we'll continue to see another price uplift.
So let me talk a little bit about ethane. I think what we've done is something a little bit different than everyone else. We wanted multiple outlets for the ethane production. We're up in Pennsylvania, southwest Pennsylvania. At that point in time, there really wasn't a market for ethane. So, what we did is we took the opportunity and found different outlets for our -- for the ethane.
As I mentioned, the line going up to Nova Chemical up in Sarnia, Canada, that commenced line sales this quarter, we expect to be a 15,000 barrels of ethane a day by -- starting January 1, 2014. We have a contract with ATEX, taking it down to Mt. Bellevue, about 20,000 barrels a day. That will kick in in 2014. And then once again another we're very excited about is being able to export ethane out of Philadelphia. We'll be the first E&P company to be able to export ethane internationally, putting it on a ship. So we're really excited about that and what the uplift in price does for it.
The other thing it allows us the opportunity is continuously give us different price markets. So this becomes a long-term hedge for ethane prices going forward because each one has its unique pricing parameter. One of the things early one that was talked about is ethane, would it float. So we obviously, we're trying to get a ship to be able to show that ethane does float.
Probably what's interesting is like 174 ships that are capable of carrying ethane in the world today. Now what will be built by Evergas for [any of those] who'll be purchasing ethane will be new ships and it'll be a little bit different to [sign].
At the end of the day, if there's a lot of things going on, and we talked about significant growth, well, how do you get there at the end of the day? And that's, you know, the 20% to 25% growth for a long period of time is corporate growth. But it's going to be driven by the Marcellus. So everyone kind of fully appreciate and understand how all of this works. At the very beginning of the day, to be able to get to the -- I'll [sound it] backwards.
3 Bcfe a day net is what we talked about. So to gross that up, you're going to have 3.6 Bcfe a day of production coming from the Marcellus. And we think we're going to have a Bcf of dry gas coming out of both the southwest, the northeast. So that gets you down to 2.6. We're going to have, as you start meeting our ethane contract, remember we have 55,000 barrels of ethane a day of contract, you'll have that. Associated with that production, with that ethane, you're also going to have propanes and natural gasolines and condensate, because of just the way all the math works, you're going to have 140,000 barrels a day of other liquids beside ethane. So you're going to have 195,000 barrels a day of liquids coming out of the processing plant. And with that you're going to have to have 1.4 Bcf of residue gas.
To get there, inlet going into the plan, it means you need -- if you're only going to have minimum ethane extraction, 1.8 Bcf a day of wet inlet gas from just the wet and the super-rich area. The only way you can sign long-term contracts to be able to allow us the opportunity to continue to get the over 3 Bcf a day is be able to have size and scale and be able to commit to long-term ethane contracts like we have. So you can see we've thought through a lot of the process to see how exactly you get to those type of numbers.
You know, it's just not only about the Marcellus at the end of the day. I mentioned earlier that we have stacked pay potential in both the Utica and the Upper Devonian. And so let's talk a little bit about -- we'll talk a little bit about the shales in Pennsylvania.
The Utica, some newer results that have come about, you'll notice that in about a mile, a mile and a half off our acreage block in West Virginia, our Utica well has reasonable potential to 2,900-foot lateral with eight stages for over 11 million a day. You can see there are several other well penetrations to the north of where we are, some of it Pennsylvania also, some a little bit farther west in Ohio, but also are very prolific in terms of Utica potential.
We believe our acreage is very well set-up. And as you can see, we have like 400,000 acres of prospectivity in southwest Pennsylvania. Obviously we hadn't forgotten about the northwest area where we continue to monitor results there.
The Upper Devonian we drove, you know, I forgot to mention that, you know, we drilled the initial horizontal Utica well in the basin. We also drilled the first -- last four Upper Devonian wells, the first four that were out there as well, and believe we have great opportunities in it as well.
They're going to continue to balance how we're going to utilize the acreage position as well as the infrastructure that we have going forward.
Finally, we have two other areas that have significant oil components to it, we have large resource opportunity. Horizontal Mississippian in Oklahoma and Kansas -- big acreage position along Nemaha Uplift. We're continuing to drill out. We'll be testing some additional wells as we drill north and delineate the acreage. And if it all works out, we still have a significant number of locations, 2,000 potential locations on 80-acre spacing. So, huge resource opportunity. We're actually -- actively been drilling some wells there.
Then in the Permian, we have 100,000-acre position, 91,000 of it's held by production, with stack pay potential for decline and which I guess is now called the Lower Wolfcamp, and then the Upper Wolfcamp targets. We'll continue to drill some horizontal wells. We've recently drilled a 7,000-foot Cline well and just have recently [TD'd], probably not going to have any results for this call, at least for this time.
Tremendous resource opportunity, big stack pay area, that's what Range is really interested and continue to stay involved with stack pay. And there's a lot of industry activity that is de-risking us down the road.
It's really, you know, we found a huge supply of gas. Anytime you find the largest gas field in any location in the U.S., you're going to have to have increased demand. We believe demand is coming for natural gas in four or five different areas. I'm not going to spend a lot of time. Most people are probably familiar with most of these, the power sector, power generation, manufacturing, exports, and of course the transportation sector.
And one thing Range has done is participate in the transportation sector. We had the largest purchase of CNG vehicles in -- up until through 2012 of 150 vehicles. Currently now we have 184 CNG vehicles within our fleet. There's been a couple purchases of fleet vehicles that have been a little bit larger subsequent to that, but at the end of the day, we're walking the talk so to speak.
Third part of our story is always environmental, health and safety. We always talk about. We always think it's very important to discuss. It's very important for Range. And I think some of the innovative things that we've done over the past have been really important. Some people maybe even forgotten about it.
The first thing we did was we recognized early on as the company that discovered the Marcellus, that cementing and casing standards in Pennsylvania at that point in time were really not up to standards. We went and recommended. We went above and beyond what was really necessary and recommended new standards which are now being adopted by the DEP. We've gone to 100% recycling of water in the Marcellus, water is a short-term issue and as a result of that has now become an issue that's not very important, as long as we continue to perform and execute.
In 2010, Range also was the first company to voluntary disclose hydraulic frac fluids. And I think what you've learned at the end of the day, almost every other major independent company or every other publicly traded company, is posting all that stuff on Frac Focus.
At the end of the day, Range's story is great as we continue to look forward. Twenty to 25% growth for many years. We're going to be able to -- as long as we continue to perform at the high end of that, we will be able to double production every three years and be able to continue to double that. Cash flow will continue as long as commodity prices remain where they are. Should expect meet or exceed or outpace our production growth. And I think it's really driven by the Marcellus and the dominant acreage we have over a million acres of shale in Pennsylvania that will allow us to continue to grow for many years to come, and a huge resource opportunity.
I think it's a great opportunity. I think it's a great story. And thank you very much.
[No Question & Answer Session for this Event]
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