Is fracked natural gas sustainable? Do its public relation risks hinder sound, long-term investing? Companies such as Cabot Oil & Gas Corporation (NYSE:COG) and Range Resources Corp. (NYSE:RRC) are raking in profits from plays in the Marcellus Shale, but before making a long-term investment, I suggest you consider possible changes in states’ public policies.
The potential for boom and bust in fracked natural gas is similar to public policy’s effect on the coal industry. Companies with large holdings that require fracking (slang for hydraulic fracturing, whereby injected fluid forces open cracks in rock formations), especially in the Marcellus Shale, are paying out for investors. In the last quarter, Cabot Oil & Gas Corporation (NYSE:COG)’s reported revenue was $373.3 million, with GAAP reported sales that were 37% above the prior-year quarter at $272.1 million. Range Resources Corp. (NYSE:RRC), likewise, had revenue of $398.2 million, up 30% from the prior-year quarter’s $322.2 million.
Cabot Oil & Gas Corporation (NYSE:COG) and Range Resources Corp. (NYSE:RRC) are the top two operators in Pennsylvania, one of the states most open to fracking, where 74 companies operate gas wells. For all intents and purposes, the fracking industry seems like it’s at the precipice of a continuing gold rush.
Range Resources Corp. (NYSE:RRC) is credited with starting the Marcellus Shale boom, and in 2011 sold all its North Texas Barnett Shale holdings to ramp up Marcellus production. The company’s strategy magnifies the importance of public policy for its future, now that it’s staked its future on the play.
Its well count in the Marcellus is over 500 now, and the company expects production growth averaging 20% to 25% each year for the near future. Analysts believe that Range could reach 1.6 billion cubic feet of gas in about three years, and doubling that over time, 3 billion in six years, to surpass the U.S. record for a single year’s output. Be wary of those figures, as they’re based on assumptions about present production.
Industry image problems
Coal saw its boom, and then as those supplies waned, companies invented Mountaintop Removal, a destructive practice meant to mine thin seams of coal. With fracking, we have a practice that’s as lambasted, but much more widespread, so any negative PR also covers more ground. MTR was regional, fracking is national.
The public relations problems surrounding fracking originate in both secrecy and in tactics used to save money at the expense of image.
Let’s talk tactics first. The gas rights grab means less-reputable gas landmen may lie to save money. Recent news headlines include one about an Ohio Amish family, who sold their gas rights and received much lower prices per acre than neighbors. They can’t sue due to religious beliefs, a fact lawyers in the case say is relied on by some companies. The same article mentions an Amish lawsuit involving leasing rights, against Columbia Gas Transmission.
Why should we worry about the isolated cases in this article? With time, they build up and create a synergy corruption effect. Suddenly, Chesapeake, Cabot and Columbia all mire into one big tangled ball in the public’s minds.