The Quest for Marcellus Shale Exposure

The Marcellus Shale is quickly becoming the biggest thing in the U.S. natural gas industry since the Barnett Shale. You can hardly watch CNBC without hearing Jim Cramer talk about the Marcellus Shale and his “wildcat drillers.” As investors, we know that if you want exposure to the Marcellus you cannot just buy any company with Marcellus acreage. You need to buy the company with the greatest exposure to the Marcellus if you want to maximize your investment gains.
Unfortunately, I have not been able to find any publicly traded company that is a true pure play on the Marcellus Shale. But, after looking at the different companies involved in the play, some clearly stand out as having more exposure than their peers. The following table shows the enterprise value per acre of the Marcellus Shale drillers:


Marcellus Acreage
Debt
Market Cap
Enterprise Value
EV / Marcellus Acres ($)
Atlas Energy (ATN)
516,000
925M
2.4B
3.3B
6,574
Range Resources (RRC)
1,150,000
1.7B
9.2B
10.9B
9,564
Rex Energy (REXX)
57,000
81M
880M
961M
16,860
Quest Resource (QRCP)
119,000
339M
313M
652M
5,484
Chesapeake (CHK)
1,200,000
14.5B
30.6B
45.1B
37,643
Exco Resources (XCO)
415,000
2.9B
3.4B
6.3B
15,320
Cabot Oil & Gas (COG)
100,000
448
5.4B
5.9B/p>
59,380
Equitable Resources (EQT)
300,000
1.9B
7.4B
9.3B
31,157
XTO Energy (XTO)
152,000
7.3B
29.5B
36.9B
243,204
EOG Resources (EOG)
700,000
1.1B
26.9B
28.1B
40,164
National Fuel Gas (NFG)
700,000
1B
4.4B
5.4B
7,847
CNX Gas (CXG)
161,000
151M
5.5B
5.6B
35,286
Natural Fuel Gas and EOG Resources have a joint venture that is developing Natural Fuel Gas’s 700,000 acres. However, they refuse to release details about the joint venture. As a result, I believe that you should assume that National Fuel Gas has exposure of far less than 700,000 acres.
Cabot Oil & Gas is another company that refuses to say just how many acres it has and will only say that it has more than 100,000 acres. The companies’ hesitancy to reveal their true acreage should be considered a red flag in any due diligence proceedings.
Atlas Energy Resources and Quest Resources seem to be the clear standouts with the most exposure to the Marcellus Shale. Both Atlas Energy Resources and Quest Resources have had recent share offerings and the current market caps are reflected in the chart above. But despite the dilution that occurred as a result of these offerings, these two companies still represent some of the most compelling investments in the Marcellus Shale play.
An important footnote for Quest Resources is that one should remember that the company operates with two subsidiary companies, Quest Energy Partners (QELP) and Quest Midstream Partners. Quest Resources is required to consolidate the balance sheets of Quest Energy Partners and Quest Midstream Partners on its balance sheet, even though they are entirely separate companies. Below is a breakdown up the company's debt structure.


Total Debt

339,000,000
QRCP less limited partner’s debt
35,000,000

Subsidiary Debt
QELP
198,000,000
QMLP
106,000,000
As you can see, most of the debt on Quest Resource’s balance sheet is actually debt at its subsidiaries. Quest Resource only has $35 million of its own debt. This, of course, impacts Quest Resource’s enterprise value and the amount you are paying for the exposure to the Marcellus shale that you would get from buying Quest Resource’s shares. As a result, the line on the graph above for Quest Resources should instead look like the line below.

Marcellus Acreage
Debt ($)
Market Cap ($)
Enterprise Value
EV / Marcellus Acres ($)
QRCP
119,000
35,000,000
344,960,000
379,960,000
3,193
If you back out the debt at Quest Resource’s subsidiaries, the amount of exposure you get to the Marcellus Shale is in fact substantially higher. Most important, though, Quest Resource’s low debt level and significant cash flow from its subsidiaries will make the speedy development of its Marcellus Shale properties easy to finance. If you want exposure to the Marcellus Shale, Quest Resources is clearly the company that you want to own.
Another note worth mentioning is that QELP recently announced that it anticipates being able to increase its distribution from $1.64 per year to $2.00 - $2.20 per year, based on the accretion from the recent acquisition of PetroEdge Resources. This transaction represents exactly the type of value creation that can occur in the MLP capital structure. My previous articles on Quest Resources and Atlas America (the parent of Atlas Energy) can be found here and here.

Source: http://seekingalpha.com/article/85483-the-quest-for-marcellus-shale-exposure