The Quest for Marcellus Shale Exposure

The Marcellus Shale is quickly becoming the biggest thing in the U.S. natural gas industry since the Barnett Shale. You can hardly watch CNBC without hearing Jim Cramer talk about the Marcellus Shale and his “wildcat drillers.” As investors, we know that if you want exposure to the Marcellus you cannot just buy any company with Marcellus acreage. You need to buy the company with the greatest exposure to the Marcellus if you want to maximize your investment gains.

Unfortunately, I have not been able to find any publicly traded company that is a true pure play on the Marcellus Shale. But, after looking at the different companies involved in the play, some clearly stand out as having more exposure than their peers. The following table shows the enterprise value per acre of the Marcellus Shale drillers:

	Marcellus Acreage	Debt	Market Cap	Enterprise Value	EV / Marcellus Acres ($)
Atlas Energy (ATN)	516,000	925M	2.4B	3.3B	6,574
Range Resources (RRC)	1,150,000	1.7B	9.2B	10.9B	9,564
Rex Energy (REXX)	57,000	81M	880M	961M	16,860
Quest Resource (QRCP)	119,000	339M	313M	652M	5,484
Chesapeake (CHK)	1,200,000	14.5B	30.6B	45.1B	37,643
Exco Resources (XCO)	415,000	2.9B	3.4B	6.3B	15,320
Cabot Oil & Gas (COG)	100,000	448	5.4B	5.9B/p>	59,380
Equitable Resources (EQT)	300,000	1.9B	7.4B	9.3B	31,157
XTO Energy (XTO)	152,000	7.3B	29.5B	36.9B	243,204
EOG Resources (EOG)	700,000	1.1B	26.9B	28.1B	40,164
National Fuel Gas (NFG)	700,000	1B	4.4B	5.4B	7,847
CNX Gas (CXG)	161,000	151M	5.5B	5.6B	35,286

Natural Fuel Gas and EOG Resources have a joint venture that is developing Natural Fuel Gas’s 700,000 acres. However, they refuse to release details about the joint venture. As a result, I believe that you should assume that National Fuel Gas has exposure of far less than 700,000 acres.

Cabot Oil & Gas is another company that refuses to say just how many acres it has and will only say that it has more than 100,000 acres. The companies’ hesitancy to reveal their true acreage should be considered a red flag in any due diligence proceedings.

Atlas Energy Resources and Quest Resources seem to be the clear standouts with the most exposure to the Marcellus Shale. Both Atlas Energy Resources and Quest Resources have had recent share offerings and the current market caps are reflected in the chart above. But despite the dilution that occurred as a result of these offerings, these two companies still represent some of the most compelling investments in the Marcellus Shale play.

An important footnote for Quest Resources is that one should remember that the company operates with two subsidiary companies, Quest Energy Partners (QELP) and Quest Midstream Partners. Quest Resources is required to consolidate the balance sheets of Quest Energy Partners and Quest Midstream Partners on its balance sheet, even though they are entirely separate companies. Below is a breakdown up the company's debt structure. 

 

	Total Debt
	339,000,000
QRCP less limited partner’s debt	35,000,000
	Subsidiary Debt
QELP	198,000,000
QMLP	106,000,000

As you can see, most of the debt on Quest Resource’s balance sheet is actually debt at its subsidiaries. Quest Resource only has $35 million of its own debt. This, of course, impacts Quest Resource’s enterprise value and the amount you are paying for the exposure to the Marcellus shale that you would get from buying Quest Resource’s shares. As a result, the line on the graph above for Quest Resources should instead look like the line below.

	Marcellus Acreage	Debt ($)	Market Cap ($)	Enterprise Value	EV / Marcellus Acres ($)
QRCP	119,000	35,000,000	344,960,000	379,960,000	3,193

If you back out the debt at Quest Resource’s subsidiaries, the amount of exposure you get to the Marcellus Shale is in fact substantially higher. Most important, though, Quest Resource’s low debt level and significant cash flow from its subsidiaries will make the speedy development of its Marcellus Shale properties easy to finance. If you want exposure to the Marcellus Shale, Quest Resources is clearly the company that you want to own.

Another note worth mentioning is that QELP recently announced that it anticipates being able to increase its distribution from $1.64 per year to $2.00 - $2.20 per year, based on the accretion from the recent acquisition of PetroEdge Resources. This transaction represents exactly the type of value creation that can occur in the MLP capital structure. My previous articles on Quest Resources and Atlas America (the parent of Atlas Energy) can be found here and here.

Disclosure: Long ATLS & QRCP

Comments

[Mark from Reston]

What about a mention for Range? They hold the second most number of acres and are valued at the third lowest per acre. Reasonable debt level. They recently announced that they are looking at 30 million feet per day in the first quarter of 2009. Do the math.

[User 217910]

This table is nonsense. For example, it divides enterprice value by Marcellus acreage, but fails to take into account all of the other acreage owned by a company. CHK for example, has acreage in Hayneville and other areas, not just Marecllus. Assigning all of its EV to Marcellus acreage is misleading. The same holds true for many others.

[Investor612]

I see no mention of Southwestern. According to their website they are drilling three wells in Marcellus.

[DaveW]

Nice article, thank you. It would be interesting to know, regarding all companies mentioned above, how equal are the overall drill sites/Marcellus hectare, the amount of horizontal drilling and other state of the art technologies being employed, and supporting infrastructure (pipelines, etc.) in place or planned to get said NG to market. These factors could be equally as important as E.V./Marcellus acreage.

[DaveW]

User 217910: the author is only writing about how to gain the purest play on the Marcellus. When the Marcellus is fully tapped into, the gains companies realize will be in proportion to their exposure.

[DaveW]

M from R: I agree RRC has more going for it other than E.V./acre. For example they just inked a deal with MarkWest to put pipelines in place for delivering NG to market. Without supporting infrastructure bottlenecks will occur and severely dampen growth. Infrastructure is Rex Energy CEO Mark Hulbert's greatest concern currently (see interview with Cramer).

[Shale Data Man]

Check out this Barnett Shale maps site...soon to be for Marcellus Shale

[pikser]

Epsilon Energy Ltd (EPS.TO) is also doing very well in the Marcellus.

[User 35004]

No mention is made of the quality of the acreage. RRC has been around this area for 20-25 years and will be the first to start ramping production with infrastructure build. I think they are 2-3 years ahead of others.

[Herkimer]

There is one company that is not listed in the article and it is a company named Nornew that is owned by a Norwegian stock company Norse Energy Corp.

The Market cap. of the company is 400 mill. $ and the company has more than 170 000 Marcellus acres. The stock is traded at Oslo Stock exchange.

The company is also one of the company that is established in Brazil and November 2007 it got three blocks in the Santos basin as an operator (50%). It has about 5000 BOED in production mainly from the Manati field.

This company is,as you clearly see, way under priced. The Norwegian market don`t understand the potential in the Marcellus Shale.

[younguns]

From what I have heard, Atlas Energy owns the only major pipeline that runs through the area of the Marcellus Shale, Atlas Pipeline Partners L.P. (APL), a subsidiary to Atlas Energy. (ATN)

This would mean that Atlas Energy is making money on both ends, selling their gas as well as making money from pipeline fees for delivering their competitors' NG to market in the Northeast & Midwest.

Speaking of selling NG gas, Atlas Energy extracts almost all of their Marcellus Shale NG from the old, traditional method of vertical drilling as opposed to the newer horizontal drilling method. The fact that they are recovering good amounts of NG by way of the older, traditional vertical drilling method gives me the feeling that their portfolio of Marcellus acreage is superior in quality to the other players in the Marcellus Shale.

Atlas Energy has begun using the newer horizontal drilling method on several test wells in 2008 and plans have been announced for many more throughout 2009.

Once Atlas Energy is fully engaged in the use of the horizontal fracturing technique, the natural gas output of their Marcellus acreage should skyrocket.

[penny]

This play is moving to the south and west of all the above players and needs to be looked at in WV as well as Pa, There are several Private companies with as much acerage as some of the above mentioned companies. The fact that they invest there money not yours and mine shows it is real.

[pop pop from PA]

Norse Energy is currently focused heavily in Chenango County, NY and has pipeline assets in NY as well. A large percentage of its acreage was acquired over the past few years at lease "bonus" rates of $50/acre and under. (I know because I have one of them!) I began acquiring stock at $1.70 per share - a bit early, since Norse hit a dry oil well in Brazil last month and the bad news helped to knock the stock down to $1.15 over the past few weeks. Buying as much as I can afford now! Good company website at Norseenergy.com.

[PA GAS Leasee]

This article fails to take into account where the acreage is loctated. Not all Marcellus acreage is the same...many of the companies listed hold acreage in western PA, this is not over the core Marcellus Shale, which is much thicker and deeper than anything in Western PA. Also CHK holds 1.2 million arces most of which is in the "core" area. I live and own property in Wyoming County, PA.....the heart of Marcellus shale.....my bet is with Chesapeake Energy.

[Jmar11]

I like Oil Producers but prefer dvn. I did some research on them and though they went down a lot in July, dvn is close to a bottom and represents a buying opportunty. Here's a pretty good analysis of nat gas producers: www.greenfaucet.com/tr....
The other recommends SWN, RRC, NFX, and HK so that opens up a few more opportunities for people looking to follow that route.

[Haynesville]

gomarcellusshale.ning.... this out