Appalachian-exposed investments attracting great interest

Companies positioned in Appalachian shale gas are performing well above domestic average and trading at higher multiples

Marcellus well performance getting better

IHS analysis concludes that average well performance in the Marcellus northeast Pennsylvania area continued to improve during the first half of 2013. The number of wells with a peak month production of 10 MMcf/d or greater has improved dramatically over the past 12 months. Meanwhile, the number of wells drilled with a peak month rate in the lowest production intervals (0 to 1.9 MMcf/d) has dropped from greater than 50% in the second half of 2009 to less than 15% in the first half of 2013. We also conclude that over 80% of the wells drilled in the Marcellus will be economic, assuming a flat $4.00/Mcf gas price. IHS's expected rate of return for the average Marcellus well in northeast Pennsylvania is now over 40%, which in our view would be very attractive even if one were to assume lower average natural gas prices for the life of the wells. With these results is it any wonder the industry is continuing to drill aggressively in the play even while natural gas prices remain depressed?

Our analysis reaches a similar conclusion for the southwest Pennsylvania Marcellus, the second core area for the play in the state. The industry is drilling more top-quality wells and fewer duds. This means there are ample opportunities to drill for economic natural gas wells in the Marcellus play. We are currently updating our analysis for the Utica wet gas and Utica dry gas windows, but the general conclusion is that both of these hydrocarbon windows in the Utica also look economically attractive. The Upper Devonian play is another emerging natural gas play in the Appalachian area that will attract additional drilling attention in the years to come.

Appalachian-exposed E&Ps receive premium stock valuations

A favorable outlook for the Marcellus, Utica, and Upper Devonian is attracting investor's interest in exploration and production (E&P) companies with good exposure to these exciting Appalachian plays. Our analysis concludes that the Appalachian producers are trading at a material premium to North America oil and gas company peers. The median North American natural gas-weighted E&P producer trades at a 6% discount to our value (appraised net worth [ANW] /share is the IHS net asset value for the stock), while the median Appalachian producer trades at roughly a 20% premium above our net asset value. The Appalachian peer group also trades at a premium compared with the North American natural gas peers in terms of cash flow multiples and stock price-to-earnings ratios. Our Appalachia peer group offers substantially higher EBITDA growth (earnings before interest and depreciation) and cash flow per share growth, fueled by the strength of the Marcellus and Utica drilling. This supports the premium valuation and the attractiveness of having a portfolio overweighted to Appalachian assets.

Source: IHS

Antero IPO huge success

We initiated coverage of Antero Resources simultaneously with its initial public offering (IPO). With the Appalachian-exposed producers all trading at significant premiums to our asset values, we concluded that it was great timing on Antero's part to go public when it did. The Antero public offering was a terrific success with the price of the offering raised, the overallotments sold and the stock price rising dramatically on the day of the offering. Antero offers a strong growth outlook as do all in the Appalachia group, and therefore we would expect Antero to trade at a premium to its North American peers. Our analysis concludes that Antero is highly regarded by the investment community; of our Appalachian peer group only Cabot Oil and Gas trades at a higher stock price-to-asset value ratio.

The relatively high stock price valuation for Appalachian oil and gas producers no doubt played a role in the decision by Consol Energy to sell off part of its coal portfolio. The reduction in the coal portion of the asset mix is a strategic decision by Consol to increase the focus on its existing Appalachian natural gas assets. While Appalachian natural gas producers are of great interest to investors, US coal companies are not. It makes much sense under current market conditions for Consol to rebrand itself from a coal producer to an Appalachian natural gas producer.

What's coming?

Posted 19 November 2013

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.