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Post-election E&P market bump has eluded Appalachian drillers

Amid unseasonably warm weather capping winter gas prices and continued worries about pipeline capacity from the Marcellus and Utica shales, stocks in Appalachian shale drillers have not enjoyed the post-election bump of their E&P peers in other plays, an S&P Global Market Intelligence analysis found.

While the S&P's index tracking oil and gas producers gained 12.4% between the Nov. 8, 2016, election and the Jan. 25 close, a basket of the stocks of the top 10 drillers in Appalachia gained 3%. The broader S&P 500 index gained 6.5% in the same period.

But colder weather and higher prices are on the way, according to Barclays Capital Inc. analyst Thomas Driscoll. "Gas market fundamentals are improving," he told his clients Jan. 23. "Storage levels have fallen ~2% below the five-year average and we expect the first winter-on-winter production decline since '09-'10."

He sees Cabot Oil & Gas Corp., with a stack of pipeline completions and direct-to-power-plant gas sales in 2018, as undervalued and a good way to enter the Appalachian plays.

"[Cabot's] gas price should improve ~$0.40/Mcf as 7 projects commence service in 2018 and increase takeaway by 80%," Driscoll said. "The scheduled 2018 projects include 4 power plants and 3 pipelines that should increase [Cabot's] net takeaway by 80% (35% without [Atlantic Sunrise pipeline]) or 1.4 Bcf/d. We estimate these projects will improve company-wide gas prices by ~$0.40/Mcf. We assume [Cabot] will capture ~$0.08 of this benefit in 2018 and the rest in 2019." He upgraded Cabot to overweight.

Williams Capital Group LP analyst Gabriele Sorbara likes Rice Energy Inc. as a way into Appalachia. "Following the recent sell-off, we are upgrading [Rice] to Buy (from Hold), as shares now present a more attractive risk/reward profile at our revised price target of $27 (from $25)," Sorbara said Jan. 24.

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Shares in Rice closed the market Jan. 25 at $21.73 and have ranged between $8.06 and $29.36 over the past 52 weeks. Shares in Cabot have ranged between $18.48 and $26.74 over the previous 52 weeks and closed on Jan. 25 at $22.93.

Average revenue in the first six months of a well's life in the Marcellus, which is the most productive and profitable time in the cycle of a rapidly declining shale well, has dropped 12%, according to FBR & Co. analyst Joseph Allman's operator period well performance model, ranking the Marcellus last among the major shale plays. In contrast, Ohio's Utica Shale had wells that produced the second-highest revenue in their first six months, according to FBR.

"Delaware Basin tops by productivity," Allman said Jan. 24. "The Marcellus is one of the least productive on both an absolute basis and on a lateral foot basis for the fourth straight month. Since we rank based on normalized revenues, gas plays like the Marcellus have a pricing disadvantage (without factoring in wide basis differentials). However, the Utica is mostly gas, and it ranks No. 2 on an absolute basis."

"Pipeline constraints could be a factor for Marcellus per well average productivity," Allman added.

But new pipelines out of the Northeast shales may not be the cure-all for low realized prices, according to a Jan. 23 analysis by RBN Energy LLC analyst Sheetal Nasta. Looking at gas receipts into Tallgrass Energy Partners LP's recently opened Rockies Express Pipeline LLC Zone 3 Capacity Enhancement Project, gas was coming into REX from other pipelines such as the EQT Midstream's Ohio Valley Connector, not from new production.

"What that implies is that the majority of the incremental REX receipts to fill [Zone 3 Capacity Enhancement] so far have come from existing not new production volumes," Nasta said. "In other words, the supply is being redirected from other takeaway capacity out of Ohio, likely southbound out of the Texas Eastern Transmission Co. (TETCO) system."

"It's a harbinger of things to come: Northeast pipelines competing for supplies. As more of new pipeline projects to the south and west are completed, expect to see a lot more of this kind of competition mostly new projects 'stealing' gas from legacy pipes," Nasta said in a note to clients.