Natural gas prices slowly increased this year, driven by a colder winter and other consumer demands. This reverses the 2012 trend of declining prices. Not surprisingly, drilling activity declined with natural gas prices and then increased as prices rose. With natural gas prices coming off historic lows, which gas producers will benefit first? My bet, the ones paying the lowest production costs. Let’s look at three examples.
Small player in western Pennsylvania
Operating primarily in western Pennsylvania and West Virginia, EQT Corporation (NYSE:EQT) produces natural gas out of the Marcellus and Huron shale. EQT also operates pipeline services through its stake in the master limited partnership EQM. According to its recent earnings report and conference presentation, EQT produced a record volume of natural gas in 2012. Too bad natural gas prices dropped to historic lows during this same time and drove earnings down 61% from the year before.
That was then, what does the future hold? For one, increased production from increased proven reserves. EQT’s production grew by 30% over the previous year, primarily from Marcellus shale. Marcellus shale also provides EQT with the most reserves. EQT’s midstream business mostly handles its own natural gas and thus should grow with the company’s production. EQM also handles third party gas and this business should grow as well.
Even better, EQT Corporation (NYSE:EQT) boasts one of the lowest finding and development and operating expenses in the industry. The company claims their F&D costs are $1.30/Mcfe, far below the industry average of $2.99/Mcfe. This combination of growing production, midstream activity and low production costs positions EQT well as gas prices climb.
In case you’re wondering, EQM looks more like a capital gains investment than your usual MLP income investment because of its low yield. It’s only a year old, so there’s not much of a track record to consider.
Home on the range
One company with lower production costs is Range Resources Corp. (NYSE:RRC). Range also operates in Marcellus shale as well as in Texas and Oklahoma. Every year since 2003, Range has grown its natural gas production and proved reserves. That’s been good news for Range stock which climbed the mid $30’s/sh to about $80/sh today.
Like EQT Corporation (NYSE:EQT), Range earnings took a bit hit over the last year. Despite record production, the same declining gas prices that punched holes in EQT’s earnings punched holes in Range’s earnings. On a brighter note, Range’s production costs steadily declined over the past three years and the company forecasts 20-25% production growth for 2013.
Unlike EQT, Range Resources Corp. (NYSE:RRC) racked up some debt during 2012, increasing its burden by almost 50%; something to think about before investing. Range also sold several sub-optimal assets to concentrate on Marcellus shale production. A good move as Marcellus shale gives generally yields more bang for the drilling buck. As they highlighted in their conference presentation, Range plans to continue selling off marginal assets and to concentrate on high yielding shale gas plays.
Gas from the Cowboy State and the Marcellus
Marcellus shale attracts attention and Ultra Petroleum Corp. (NYSE:UPL) joins EQT Corporation (NYSE:EQT) and Range Resources Corp. (NYSE:RRC) in this low cost play. However, Ultra’s primary production activity involves natural gas and natural gas liquids in Wyoming, specifically the Jonah and Pinedale plays. The company considers these Wyoming assets to be some of the best natural gas fields in the country.
Ultra shared a similar experience as EQT Corporation (NYSE:EQT) and Range with declining gas prices causing a decline in earnings and stock price. Ultra responded to declining gas prices by reducing debt, F&D costs and capex plans for 2013. Ultra’s drilling activity declined, particularly in Wyoming as low gas prices pressured cash flow. As a result, Standard and Poor’s states Ultra has one of the best cost structures in the industry.