Marcellus Update: EQT Increases EURs, Positive For EQT And Nearby Operators

by: Josh Young

EQT (NYSE:EQT) announced today that it increased its estimated ultimate recovery rates (EURs) in the Marcellus. It also increased drilling inventory through effective down-spacing (drilling wells closer together) and well type curves (implying higher rates of return from drilling wells).

Obviously this is positive for EQT, as it means their Marcellus drilling program is more economic than had been previously thought. It bumps EURs up closer to the level that high-valued Range Resources (NYSE:RRC) and Cabot (NYSE:COG) are generating in the core of the North Eastern Pennsylvania portion of the Marcellus play. As can be seen in the chart below, Cabot stock has outperformed EQT stock over the past year on the back of Cabot's excellent well results, so improving results for EQT could help EQT stock "catch up".

EQT Under-performed v. COG in the Past Year
(Click to enlarge)

The EUR increases are particularly impactful in Northwest West Virginia, which had not been considered as delineated or as prospective as SW Pennsylvania or NE Pennsylvania. EQT is now booking reserves at the same level in NW WV as in SW PA, which is positive for their prospects in NW WV and also reads through positively for other operators in the area.

Oil and gas companies active in Northwest West Virginia include Chesapeake Energy (NYSE:CHK), Magnum Hunter (MHR), Stone Energy (NYSE:SGY) and Gastar Exploration (NYSEMKT:GST). Gastar has the most leverage to that area compared to the other operators and has posted some of the strongest results .

GST Has Under-performed v. Marcellus Peer Group in Past 2 Years
(Click to enlarge)

Despite these strong results, Gastar stock has underperformed its peer group of Marcellus stocks and still trades at a discounted multiple versus that group. Gastar had been booking 6.3 BCFe EURs and was projecting 40% IRRs.

Gastar West Virginia Well Economics
(Click to enlarge)

If it moved to the higher 9.8 BCFe EUR level EQT is booking, that would have a substantial impact on its booked reserves. Gastar management has stated repeatedly that the company is being conservative in its bookings of EURs, so it is conceivable that such a move up could happen.

Another company with leverage to Northwest West Virginia is Magnum Hunter. Magnum Hunter is led by Gary Evans, who successfully sold the first Magnum Hunter for a "38% average shareholder return". Magnum Hunter has been plagued by accounting issues recently. While not the focus of the article, it is worth mentioning that the sale of the first Magnum Hunter likely left Gary Evans independently wealthy and demonstrated his ability to create value, meaning he is an unlikely accounting fraud perpetrator. However, Magnum Hunter is already booking EURs similar to EQT's new EURs, so while this announcement by EQT helps validate that positive view, it may not have as much impact on Magnum Hunter as on Gastar.

Disclosure: I am long GST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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