Southwestern Doubles Down on the Marcellus


Southwestern Energy became the latest beneficiary of Chesapeake Energy's asset disposition program. Southwestern was able to pick up 162,000 net acres in the Pennsylvania portion of the Marcellus Shale for a rock bottom price of just $93 million. This will bring Southwestern's total position in the play to 337,000 net acres.

While the acquired acres are near Southwestern's existing position, these are more prospective acres. Current production from the acquired properties is just 2 MMcf per day from the 17 gross producing wells. However, as you can see on the map below, these the acquired acres fit in nicely with Southwestern's existing Marcellus position:

Source: Southwestern Energy Investor Presentation

The deal also fits in well with the company's plan to grow both production and reserves by double digits. Because of its low-cost production, Southwestern can still drill for gas when most others cannot. The company sees strong growth in the year ahead as its low-cost operations are setting the stage for the company to enjoy a record year.

The Marcellus is well-known for its low cost of production, which is why many drillers have seen it fuel a recent surge in their stock prices. Marcellus-focused companies like Range Resources , Cabot Oil & Gas , and EQT Resources are among those enjoying a nice run so far this year as you can see in the following chart:

RRC Total Return Price Chart
RRC Total Return Price Chart

RRC Total Return Price data by YCharts

Cabot boasts of finding some of the best producing wells in the Marcellus as last year the company had 15 of the top 20 Pennsylvania Marcellus wells. The economics in the Marcellus are so good that the company believes it will produce $375 million in free cash flow next year, which is a nice problem to have. The company can either return more cash to investors or use the funds to accelerate its Marcellus drilling program.

Range Resources also enjoys some very profitable Marcellus wells. A bulk of its holdings are in the western part of the state which holds the more lucrative rich gas. The enticing economics are behind the company's drive to see 20%-25% annual production growth over the next few years. This isn't growth at all costs, as the company is focused on improving on a per-share basis to ensure all investors benefit from its success.

Last but not least is EQT, which enjoys a 53% after-tax internal rate of return on its Marcellus wells when natural gas is above $4. Like Range, its acreage is mainly concentrated in the western part of the state. One of the reasons its returns are so good is that the company has the third-lowest average finding and development costs over the last three years, behind only Range and Cabot.

Southwestern is the lone laggard this year which is something it's hoping to correct by doubling down on the Marcellus. As you can see from the performance of its peers, this isn't a bad idea. When you add in the rock bottom price it's paying to Chesapeake, you can understand why this is a deal to be excited about.

This sale marks another in a long line of asset sales from Chesapeake Energy. The company's recent wheeling and dealing has energy investors hard-pressed to find another company trading at a deeper discount. Its share price depreciated after negative news surfaced concerning the company's management and spiraling debt picture. While the debt issues still persist, giant steps have been taken to help mitigate the problems. To learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy.

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Motley Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Range Resources. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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