Marcellus / Utica

[dan_s]

Mid-Cap E&P: Marcellus-Utica Conference Takeaways
Drew Venker, CFA – Morgan Stanley
October 5, 2015 4:37 AM GMT

Morgan Stanley hosted 8 Marcellus/Utica E&Ps and 3 midstream and services companies in Pittsburgh. Sentiment was generally bearish from both mgmt teams and investors. Utica took the spotlight.

Dry Gas Utica was the highlight of the conference. Across the speakers, the consistent theme was excitement about the Dry Gas Utica, particularly the eastern portion of the play in Southwest Pennsylvania and West Virginia. EQT conveyed its belief that production will remain flat on its initial well (Scott's Run) until it hits line pressure, which EQT conservatively expects to not be reached for another 150 days. We estimate that the subsequent 2 wells would generate pre-tax IRRs of 15-50% at $3.50 Henry Hub, at their AFE of $17 million, assuming they perform similar to the first well. With new, lower cost dry gas gathering we estimate these returns would improve to 60-145%. However, with only a few tests, limited production history, and high well costs, industry activity in 2016 will be focused on honing well designs and delineating the play. For these reasons the play is unlikely to enter development mode until 2017/18.
General bearishness from both management teams and investors at the conference. With the exception of one or two management teams, sentiment was overwhelmingly bearish. In our view this is largely because commodity prices have failed to improve and due to the sector's notable underperformance in recent weeks relative to gas fundamentals which are little changed since the summer.
M&A activity remains limited near-term. Most operators expressed their view that sellers have not felt enough distress yet for the bid-ask spread for assets to narrow to attractive levels. We believe this is unlikely to change in the near-term as few companies will see meaningful cuts to borrowing bases this fall. We see better potential acquisition opportunities in the Utica as several operators have expressed willingness to sell (CHK, REXX) and smaller operators with attractive acreage.
-------------------------------------
Super El Nino winters historically start off mild, but finish very cold and wet. My view is that natural gas prices will remain in the in the $2.50 range until we get some very cold weather in Q1 2016. If LNG exports are ramping up at the same time, it could get interesting. - Dan