Top Gas Producers Are Growing Liquids Production Part IV

by: Michael Filloon

This is the fourth and final article on the top U.S. natural gas producers increasing liquids production. These four articles each covered five of the top twenty producers. This article will focus on producers sixteen through twenty.

El Paso (EP) is the sixteenth largest U.S. natural gas producer. Since the second quarter of 2010, it has increased gas production by 6.3%. It reduced U.S. natural gas rig counts from 8 to 6 from January of 2010 to the present. Since 2007, El Paso has grown its inventory 30% per year. Its core areas are mostly oil, which is 48% of future inventory. In 2011, oil volumes will grow an estimated 35% to 40%. Oil could produce up to 45% of 2012 revenues. It has 75000 net acres, or 1145 locations in the Eagle Ford. Virtually all of its inventory is in the oil and volatile oil windows. It has 138000 acres, or 800 locations in the Wolfcamp. It also has 140000 acres in the South Louisiana Wilcox. These three oil plays will need additional rigs to ramp production. El Paso already has three rigs running in the Eagle Ford. With the multiple pay zones and large acreage, it could support significantly more. It also has two rigs in south Louisiana. If El Paso can execute, this could be an interesting story. When this company is separated into two companies, I think El Paso has a very good inventory of work with just the plays in Texas.

Ultra Petroleum (NASDAQ:UPL) is the seventeenth largest U.S. natural gas producer. It has increased this production by 13.2% since the second quarter of 2010. It has decreased its number of rigs drilling for U.S. natural gas from 11 to 8 since January of 2010. Ultra has done a fantastic job of keeping all in costs down. It has operations in two very good plays, at least by natural gas standards. Ultra has about 56000 net acres in the Green River Basin. Its legacy holding is 250000 net acres in the Marcellus. It could have significant upside based on 100000 net acres in the D-J Basin of the Niobrara. If this area sounds familiar, it is not far from Samson's (NYSEMKT:SSN) acreage sold to Chesapeake (NYSE:CHK) in October of last year. The Niobrara could provide a significant increase in oil production. I am not bullish Ultra, but would to see a concerted effort to add oil production. It has had very good results in the Marcellus, including some of the best initial production numbers.

QEP (NYSE:QEP) is the eighteenth largest U.S. natural gas producer. It has increased this production by 19.3% since the second quarter of 2010. It has increased its rigs drilling for U.S. natural gas by one since January of 2010. This brought to total to 16. Although QEP is mainly a gas producer, it has some very good acreage in liquids plays. It has 90000 net acres in the Williston Basin Bakken/Three Forks. Its Bakken acreage is located in the Fort Berthold Indian Reservation. This is just south of the Sanish and Parshall fields, which have had very good producing wells. It also has 77600 net acres in the Woodford. Of this acreage 78% has moderate to high levels of condensate and NGLs. QEP has 26700 net acres in the Granite Wash. These wells have up to 5 oil dominated pay zones. It has 40325 net acres in Texas and Oklahoma "Wash" areas. These wells also have a possible five oil dominated pay zones. It has 154600 acres in the eastern Rockies. These basins are oily and have had decent IP rates. In 2009, only 9% of cap ex was allocated to liquids dominated plays. 2011 cap ex has 13% spent on the Bakken, 11% spent on the Cana Woodford, and 8% on the Granite Wash. In two years it has increased by 23%, with the expectations this will increase. QEP seems to be headed in the right direction as it has added liquids rich plays and seems to be ramping up this production.

Newfield (NYSE:NFX) is the nineteenth largest U.S. natural gas producer. Since the second quarter of last year it has decreased this production by 8.4%. Total U.S. rigs drilling for natural gas has decreased from 14 to 10 since January of 2010. Newfield's proved reserves are 82% domestic. Newfield is doing a great job of moving into liquids rich plays. It plans to spend its entire 2011 budget of $1.9 billion to develop these types of plays. This could increase oil production an estimated 50%. It has 410000 net acres in the Arkoma and Anadarko Basins. 33% of its 2011 capital budget will be spent on the its mid-continent holdings. These are a play on the Woodford shale and Granite Wash. Newfield recently set a new production record in the Granite Wash. Newfield has 850000 net acres in the Rockies region, and will spend 34% of this year's budget on this area. The Williston and Uinta Basins are its main producers, but I would watch its development of the southern Alberta Basin. This could be a reasonably good play for Newfield and Rosetta (ROSE), depending on the number of commercial pay zones. Newfield's onshore Texas acreage is in one of the best liquids plays in the country. It has 335000 net acres in the Eagle Ford centered in Maverick, Dimmit, and Zavala counties. 15% of its 2011 capital budget will be spent here. Newfield is improving its business by the drill bit. It continued focus on liquids is a good reason to be bullish this company.

EXCO Resources (NYSE:XCO) is the twentieth largest U.S. natural gas producer. Since the second quarter of 2010, it has increased this production by 74.1%. It has also seen a 123% increase in rigs drilling for U.S. natural gas. It currently operates 29, which is up from 13 in January of 2010. EXCO Resources does have oil production from its acreage in the Permian. This is productive as costs are low with conventional resource. It estimates 45% of production in the Permian is oil. Going forward, it seems EXCO Resources plans to continue increasing rigs in the Marcellus. I am not real excited with this company. Its stock has not traded well since August of 2008.

The transition from gassy to liquids rich plays should continue into the foreseeable future. Since the second quarter of 2010, U.S. natural gas production in the top twenty producers increased 2.7%. This is more than the liquids increase of 1% over the same time frame. I think these numbers are skewed due to the drilling moratorium in the Gulf of Mexico. The top twenty U.S. natural gas producers decreased overall natural gas rig count by 6% from January of 2010. The top twenty U.S. liquids producers increased rig counts in liquids projects since January of 2010 by 257%. I believe this growth will continue for years, as many companies are continuing to plan rig additions into 2013. Unless there is a major change or legislation, we will continue to see a bullish liquids and bearish natural gas pricing.

There are several ways to play this transition from gas to liquids production. The companies I believe will benefit the most are:

  1. EOG Resources (NYSE:EOG) -liquids production up 53.6% since Q2 2010
  2. Newfield (NFX) -liquids production estimated to increase 50% in 2011
  3. Apache (NYSE:APA) -liquids production up 37.1% since Q2 2010
  4. Chesapeake (CHK) -liquids production up 62.4% since Q2 2010
  5. Marathon (NYSE:MRO) -liquids production up 26.3% since Q2 2010
  6. Pioneer (NYSE:PXD)-liquids production up 23.5% since Q2 2010

Take a hard look at some of these names. Since growth in production increases cash flow. These companies will have the capital to increase development of other liquids plays.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This is the final of a four part series on large U.S. natural gas producers increasing liquids production. It is not a buy recommendation.