Range Resources Goes Old School
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A recently overlooked region called the Cotton Valley is at the center Range Resources Corp.’s $3.3 billion deal for Memorial Resource Development Corp. A conventional gas field in the country’s Gulf Coast, it is the type of land drillers have largely vacated in the years since Range Resources helped usher in the era of shale gas by first deploying modern fracking in Pennsylvania’s Marcellus Shale.
But Memorial’s operations, a field called Terryville in Louisiana, appear to be as competitive as the best stuff in the Marcellus and other parts of Appalachia, investors and analysts said. That success fits a national trend of applying new technology to old fields, reviving production. And market forces are pushing gas drillers toward a greater focus on Louisiana as a boom in the Northeast hits obstacles.
The Cotton Valley stretches from East Texas all the way to the Florida panhandle, and drillers have been working it in Louisiana at least since the 1930s, according to analytics provider IHS Inc. Less than a decade ago, many producers sold out to pursue shale drilling, including in the Haynesville layer deeper below the Cotton Valley, according to Wunderlich Securities.
But the old sandstone formation’s high-pressure sweet spots in Louisiana and Texas include four different layers rich in gas, and high pressure that helps production, according to Wunderlich. Memorial is using horizontal drilling and reaching further, and last fall reported wells with 30-day initial production averaging more than 30 million cubic feet a day. That would likely put them among the best U.S. on-shore gas wells of all time, investors said.
“I think it is some of the best stuff out there,” said David Zusman, chief investment officer at Talara Capital Management in New York, which oversees about $500 million in assets and has a stake in Memorial.
Mr. Zusman said investors have become cautious of conventional drilling. Now, Cotton Valley’s recent successes are a breakthrough, he added.
Several companies are tapping gushers in once-out-of-favor spots in that part of Louisiana. Comstock Resources Inc. and Chesapeake Energy Inc., among others have applied supersize versions of the horizontal-drilling and fracking techniques to great initial success in the Haynesville. As of Friday the state had more gas rigs drilling than any other, just two years from a low point in which it had about half as many as Pennsylvania and about a fifth as many as Texas, according to Baker Hughes Inc.
The region had been losing out to production from cheaper wells in the Northeast, but that may be changing, at least temporarily. New pipelines have been delayed in Appalachia, likely limiting production growth there to about 1.5 billion cubic feet a day in 2017 even while national demand rises by 4 billion cubic feet a day, according to Wood Mackenzie, an energy consultant.
That shortfall will likely send prices higher and have more buyers looking to places like the Gulf Coast in 2017, said Amber McCullagh, a Wood Mackenzie analyst. It “looks like a reprieve for gas producers outside the Northeast,” she added.
A lot of that demand is also coming from Mexico, and from export terminals and industrial development along the Gulf Coast, investors and analysts said. Range Resources will gain a strategic advantage from its new option to produce and sell gas from a place so close to those sources of new demand, the company’s chief executive Jeff Ventura said in announcing the Memorial deal.
Hub prices near the Appalachian fields are already trading at about a 25% discount, and at times in recent years have been only half of the Henry Hub benchmark based out of Louisiana. The pipeline bottlenecks and weak local prices likely played a role in pushing Range to buy land closer to the benchmark hub, Jefferies analyst Jonathan Wolff said in a note Tuesday.
“If the play turns out as hoped it gives them access to a stronger demand environment and the opportunity to grow,” said Craig Bethune, senior portfolio manager at Manulife Asset Management in Toronto, which manages $325 billion, including stock in Range.
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