Marcellus Operated Program Continues To Improve (Butler, PA) - Reported results from the next three well Marcellus pads (Behm pad) earlier than I had expected (thought it would be with the 3Q call) and bigger than expected with five-day IPs coming in at 6.6 MMcfepd (19.7 MMcfped in aggregate) and a 30 day rate of 5.3 MMcfepd average per well, up over 60% from prior pad well results.This points to ultimate recovery above the top end of their recently revised EUR range of 4.4 t 5.0 Bcfe. Normally, to make the aforementioned type curve they would be looking for IPs on the order of 3.2 to 3.4 MMcfepd so these are truly stand out wells. Recall that this is wet gas so for each Mcf out of the ground they are striping out 1.64 gallons of NGLs or about 39 barrels per MMcfe which will realize close to half the price of oil.
Utica Update - First Well Drilled, We'll Know Where They Stand By 3Q11 Release - The first well, the Cheeseman No. 1 in Butler County, PA, has been drilled and will be fraced in time to have initial results by the time of the 3Q call. Depending on the results of this first well look for them to drill their next well as soon as 2Q12 (bigger rig needed and the one they were using went back to Chesapeake (CHK)).
Their first test in the Warrior Prospect in Carroll County, OH, (where CHK has now drilled at least four wells) should occur in 1H12.
Operations update points to Rex Energy (REXX) hitting on almost all cylinders.Disclosure: I am long CHK, REXX.
Upper Devonian Play - They also reported a 3.06 MMcfepd IP from their first Devonian target work which is welcome news as the play is thought to be present over much of their Butler County acreage as they have seen it on the way down to all of their Marcellus tests so far. One test is likely not enough for them to venture a guess on EURs here but look for more of a defined program here in 2012.
Nutshell: What a difference a year makes. In 2010 we were lucky to see them touch the low end of quarterly results. But the Marcellus has allowed them to shift into under-promise and over-deliver mode over the course of the last three quarters, and 3Q and especially 4Q look to be setting up as guidance beats as well. Were it not for processing constraints I would be looking for higher guidance with the 3Q call, but as things now stand the ramp into year end sets up another strong year of growth in 2012 before we take into account the Utica, the Devonian and maybe the Niobrara. Moreover, the stock was often hinging on well results in the Niobrara and a string of early learning mistakes there kept a lid on the shares.
I don’t do a “from the ground up back of the envelope" here since per acre multiple will get you way ahead of the current stock price (throw CHK’s $12,000 per acre on REXX’s Utica position and you get $0.6 B, nearly equaling the current TEV before you even start to look at the company’s other assets). That’s what I would call ahead of itself since the production based fundamentals need time to catch up. There is the possibility that REXX will reload the balance sheet with an equity offering later this year or early next as they continue to significantly outspend cash flow as they chase as many as four separate plays. I would expect the deal to be done higher after REXX and CHK have announced their first Utica well results and after CHK has inked its JV there. If they can monetize the Niobrara position for close to recent acreage values they could stem the need for an offering until late next year and this idea has been brought up occasionally by management. Alternatively, they may opt to JV the Niobrara and/or the Utica and they may even look to sell some of the dry gas territory in the Marcellus. I continue to own a full position in the ZLT along with a trading position added on market weakness mid summer.
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