Rearview Mirror - New 2016 Data Confirms Improved West Virginia IP Rates

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Includes: AR, DRIP, EQT, GUSH, IEO, NDP, PXE, SOP, SWN, UOP, XOP
by: BTU Analytics
Summary

West Virginia only releases well-level oil and gas production data once per calendar year, and results from 2016 were finally just released in July.

Overall average IP rate in West Virginia has increased 20% from 2015 to 2016.

Improvements in IP rates have implications for overall production in the region and they may continue to increase.

West Virginia only releases well-level oil and gas production data once per calendar year, and results from 2016 were finally just released in July. Having data this lagged for a state that’s critical to the Southwest Appalachia (Marcellus) production outlook becomes a bit like driving forward using the rearview mirror. BTU Analytics leverages well-level production data to develop regional type curves, and based on trends from more regularly available production data in nearby Pennsylvania and Ohio (which is released monthly and quarterly, respectively), we have previously adjusted forecasted type curves for West Virginia up, despite missing historical data to verify this assumption. Since we finally have new data for well-level production in West Virginia in 2016, what does it tell us about how West Virginia IP rates have trended?

Across all West Virginia, the average IP rate has increased by 20% from 7,030 Mcf/d in 2015 to 8,425 Mcf/d in 2016. However, looking at West Virginia data by county, the increase in IP rates has not been uniform across the state, with notable gains in IP rates in Doddridge, Ritchie, Wetzel, and Marion counties helping to offset year-over-year decreases in other counties, as seen in the figure below.

The 40% increase in the average IP rates in Doddridge County to over 11,200 Mcf/d has been largely driven by wells from Antero Resources (NYSE: AR), whose IP rates in the county increased from an average 9,900 Mcf/d in 2015 to 13,500 Mcf/d in 2016. Two other key operators in West Virginia driving 2016 results include EQT (NYSE: EQT) and Southwestern Energy (NYSE: SWN). The figure below illustrates the spread of IP rates across West Virginia for these three companies. Antero has had the greatest IP rates in the state with most wells increasing in IP rates from 2016 compared to 2015. This is followed by EQT, which has a notable spread in IP rates across 2016 wells. Southwestern trails at under 4,000 Mcf/d on average in 2016, and below 2015 levels, though that may be driven artificially lower due to takeaway constraints.

One key parameter that is likely driving the difference in IP rates across companies is lateral lengths. Based on data from FracFocus, Antero Resources drilled an average of 9,400 foot laterals in West Virginia in 2016, versus EQT and Southwestern, which averaged 6,900 feet and 6,800 feet, respectively. Normalizing production rates based on lateral lengths shows that Antero still leads the pack, as seen in the figure below.

What does this glimpse of 2016 well production data tell us for 2017 and beyond? These improvements in IP rates have implications for overall production in the region, and with Antero indicating in their recent earnings they intend to continue drilling longer laterals, IP rates may continue to increase. We estimate the excess backlog of DUCs has been depleted in Southwest Appalachia, meaning production growth will need to come from new drilling. With over 9 Bcf/d of incremental pipeline takeaway projects scheduled to come online by the end of 2018, how quickly these projects fill will depend on the level of drilling activity as well as the IP rates of new wells being turned online.

Will production grow to fill these projects, and if so, how quickly?

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.