Shale Gas Ripe For Resurgence On Strengthening Henry Hub

BMI View: Our Henry Hub price forecast suggests that production will increase particularly in the Barnett and Cana Woodford shale plays over the remainder of 2014. This will be underpinned by stronger gas prices that improve the economics of production. With the top acreage position in both plays, Devon Energy is at the forefront to benefit from this development.

The Henry Hub gas price is regaining strength following the low price environment of the last four years caused by a glut of shale gas. Reduced production from some of the drier shale gas formations combined with the unusually cold 2013/2014 winter, now appear to have balanced the oversupply that has held prices down. Our Henry Hub price forecast sees an average of USD4.5 per million British thermal units (/mnBTU) for 2014, up USD1.50 from 2011, and we forecast this to rise to USD5/mnBTU in 2015 and over USD7/mnBTU by 2020.

While higher Henry Hub prices will improve the economics of developing shale plays, the unique geological characteristics and different hydrocarbon content of each play/basin means this will not happen uniformly across the US.

Henry Hub Gas Price Forecast
BMI Henry Hub Price Forecast (US$/mn BTU)

Shale Gas Ripe For Resurgence On Strengthening Henry Hub

BMI View: Our Henry Hub price forecast suggests that production will increase particularly in the Barnett and Cana Woodford shale plays over the remainder of 2014. This will be underpinned by stronger gas prices that improve the economics of production. With the top acreage position in both plays, Devon Energy is at the forefront to benefit from this development.

The Henry Hub gas price is regaining strength following the low price environment of the last four years caused by a glut of shale gas. Reduced production from some of the drier shale gas formations combined with the unusually cold 2013/2014 winter, now appear to have balanced the oversupply that has held prices down. Our Henry Hub price forecast sees an average of USD4.5 per million British thermal units (/mnBTU) for 2014, up USD1.50 from 2011, and we forecast this to rise to USD5/mnBTU in 2015 and over USD7/mnBTU by 2020.

Henry Hub Gas Price Forecast
BMI Henry Hub Price Forecast (US$/mn BTU)

While higher Henry Hub prices will improve the economics of developing shale plays, the unique geological characteristics and different hydrocarbon content of each play/basin means this will not happen uniformly across the US.

At USD4.5/mnBTU, shale gas plays that only produce dry methane gas (such as Haynesville) remain largely uneconomical. Alternatively, the economics of those plays that can supplement dry gas production with some liquids output will offer better returns. Looking more closely at individual shale plays and the relative economics we can identify a number of plays and companies most likely to be among the primary beneficiaries of from rising prices at Henry Hub over the coming quarters.

Liquids Content Key

Using a 10 year average breakeven price for the major shale plays, which takes into account typical liquids production alongside dry gas output, the Eagle Ford and the Marcellus shale plays offer the best production economics. This is due to the greater percentage of liquids produced from these two plays compared to the plays with higher dry gas content. The greater the percentage of natural gas liquids (NGLs) produced with the dry gas, the better the economics due to NGLs being priced against an oil benchmark and not the lower Henry Hub gas price.

Ten Year Breakeven Costs Of Major Shale Plays (USD/mnBTU) And Typical Well Production (%)
Shale Play 10-Year Breakeven Price - Typical (USD/mnBTU) Dry Gas NGLs Oil Other Gases
Marcellus 3.32 81% 19% 0% 0%
Eagle Ford 3.51 75% 23% 0% 2%
Barnett 4.47 85% 10% 0% 5%
Cana Woodford 4.63 88% 9% 3% 0%
Fayetteville 5.05 97% 1% 0% 2%
Haynesville 6.11 95% 0% 0% 5%
Source: "The Shale Gas Paradox: Assessing the Impacts of the Shale Gas Revolution on Electricity Markets and Climate Change", Andrew K. Cohen, Harvard College

The lower breakeven prices of the Eagle Ford and Marcellus are clearly depicted in US shale gas production history, as they are the only two plays to have seen powerful growth during the low gas price environment of the last three years (see graph below).

Alternatively, shale plays with a greater dry gas percentage such as Haynesville (see table above) have seen production drop off substantially. The Barnett, Fayetteville and Cana Woodford which offer very limited liquids production have all stagnated.

Eagle Ford And Marcellus Lead The Way
Shale Gas Production By Major Play (Bcf/d)

Barnett And Cana Woodford To Return

With our gas price forecast of USD4.5/mnBTU for 2014, we expect shale gas plays with slightly lower liquids content than Eagle Ford and Marcellus to return to production growth as their economics improve.

We have already seen a nascent improvement in company earnings suggesting a turning point is here. Q1 2014 financial results of the major US onshore unconventional developers were boosted by stronger gas prices over the quarter, a trend that will continue to improve the financial performance of shale focused companies as natural gas prices rise.

We highlight the strong economic breakeven profile of the Barnett shale, where we see activity increasing over the coming year, while we also anticipate greater interest in Oklahoma's Woodford shale play, particularly the more liquids-rich Cana Woodford area (see table above).

Devon In Strong Position

Devon Energy is the largest acreage holder in the Barnett shale, followed by EOG Resources. Due to the exposure of these companies to the Barnett shale and our expectation that it will be the next major play to offer viable economics, they stand to see the greatest benefit from the development of a stronger Henry Hub price.

Ready To Reap The Benefits Of Higher Prices
Devon Energy 10-Year Weekly Share Price (USD)

Devon, EOG and Chesapeake are also less diversified in their production asset bases compared with ExxonMobil and ConocoPhillips (the main acreage holders amongst the majors), and as such will likely see a more significant impact on their business compared to the majors.

Top Acreage Holders In The Barnett
Company Net Acres
Devon Energy 600,000
EOG Resources 430,000
ExxonMobil (XTO) 245,000
Chesapeake 215,000
ConocoPhillips 145,000
Source: Company Data, BMI Research

While the Cana Woodford play has a slightly higher breakeven than Barnett and will likely take a longer time to return to growth, Devon Energy is also the top acreage holder here. On May 7 2014, Devon entered into an agreement to acquire a further 50,000 net acres in the Cana Woodford, underlining its positive outlook for the play over the coming years. Cimerex also acquired 50,000 net acres in the same deal, bolstering its position in the play.

Top Acreage Holders In Cana Woodford
Company Net Acres
Devon Energy 300,000
Marathon Oil 163,000
Newfield Exploration 125,000
Cimerex Energy 125,000
QEP Resources 73,000
Source: Company Data
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