Reflections on Cabot earnings call

The Marcellus has been the fastest growing gas producing region ever since the Haynesville production peaked in 2012.  The other two most significant shale gas regions, the Fayetteville and the Barnett, have both been flat for years now.  These regions aren't constrained by takeaway capacity, they are constrained by costs.

Just how productive is the Northern Marcellus?  From the period of 2011 through 2013, according to Cabot’s 10k filings, their cash flow for investments totaled $2.17b, and their cash flow from operations was $2.18b.  During this period they grew production from 514 mmcfd to 1,133 mmcfd (average 2013 daily production).  They never ran more than 6 rigs during this period.  This quarter they are averaging 1.48 bcfd of gross production (about 12.5% royalty is included in this).

A typical well has 4600 ft lateral length and will produce 17 bcf of gas based on their 2013 type curves.  That yields a 100% IRR for $3/mcf gas price or 200% IRR for $4/mcf gas pricing.  Another way to visuallize this is to consider that 17 bcf of gas at $4/mcf means $68mm of revenue net of royalties per well, on a per well capital cost of about $7mm.  At $.75 per mcf of opex, operating cost over the lifetime of the well would be about $12.75mm, indicating an operating profit of $48mm per well, truly an astonishing number.  The only reason the price of gas isn’t much lower is infrastructure constraints.  The Marcellus pricing is already priced 75 cents below nymex, a much bigger differential on a percentage basis than any of the oil regions.  Despite the relatively low gas prices, the dry gas northern Marcelus is the highest return region of all the unconventional resource plays.

They say they are going to get to 2 bcfd plus (gross?) by year end, but the key will be getting the space allocations in the pipes.  

The Marcellus production has increased from less than 2 bcfd to about 15 bcfd today.  In 2009, the entire US was producing 57 bcfd average, compared to 69 bcfd average for 2013.  That means the Marcellus growth was larger than the growth of the country overall, and the Marcellus offset production declines in other higher cost regions like the Gulf of Mexico offshore and the Louisiana Haynesville shale.

Appalacian gas has historically traded at a premium to henry hub, I presume because it was closer to the big end user markets in the North East.  Today it trades at a discount (see below).  Northern Marcellus trades at an even more substantial discount, since that is where the big production growth has been.