Austin, Aug.7, stock investment .- Most investors know about the huge and lucrative Marcellus and Utica shale formations. But recently, drillers have targeted another, little-known shale formation sitting above the other two. Few investors have ever heard of this third reservoir. And fewer than two dozen wells have been drilled into it.
But initial measurements suggest it just might be the largest gas producer of them all.
It's one of the industry's best-kept secrets. Let's go exploring.
You can see in the map below the three shale gas plays stacked on top of one another in the Pennsylvania-West Virginia area. The well-known Marcellus and Utica formations are two of them. The third is called the Devonian.
Only a few drillers are targeting it.
Who's Drilling the "Secret Shale"?
Range Resources Corporation (NYSE: RRC) arrived in 2009. If its initial test pans out, Range may be able to drill at some sites into the Marcellus, Utica and the Upper Devonian from a single drill pad. The economics of this are clearly compelling.
Energy in Depth, an industry group, interviewed Range Resources' Matt Pitzarella. "It's still very early," explained Pitzarella, "but we're very excited about the potential [of the Upper Devonian drilling], especially in southwestern Pennsylvania."
Consol Energy Inc. (NYSE: CNX) is better known as a coal producer. But as coal loses favor as a fuel source for power plants, Consol is targeting the Upper Devonian while it focuses more on its natural gas business.
The company has already drilled its first successful Upper Devonian natural gas well in Pennsylvania. The well produces about 3 million cubic feet of natural gas per day. Consol says that about 300,000 acres of land under its control have commercial potential for Upper Devonian shale drilling.
Rex Energy Corporation (Nasdaq: REXX) has so far drilled a single well into the shale in Pennsylvania. The well tested at 3.1 million cubic feet of natural gas per day.
Chesapeake Energy Corporation (NYSE: CHK) has to date drilled a single Upper Devonian well in West Virginia. It has several permits to drill into the formation in western Pennsylvania. Chesapeake remains tight-lipped about its drilling results so far, as well as its plans for the Upper Devonian.
How to Play It
What's the best way to invest in this promising shale formation? All four of the above companies are already major players in the Marcellus. The fact that any or all of them could hit pay dirt in the Upper Devonian just adds to potential shareholder value.
But one driller has a big jump on all of them. Pittsburgh-based EQT Corporation (NYSE: EQT) recently announced it has drilled eight wells in the Upper Devonian.
EQT's strategy is to drill into the Marcellus and the Upper Devonian from the same well pad, saving time and money. Its development drilling success rate over the past three years is an impressive 99.6%. Its production growth for 2012 was 70% over that of 2011.
EQT has drilling rights on nearly 3.5 million acres spread across the Appalachian Basin. It estimates its Upper Devonian proven and probable reserves at 2.4 trillion cubic feet. It expects to drill 22 additional wells in the formation before the end of this year.
Why invest in EQT? It's the earliest-in player in the Upper Devonian and has one of the lowest cost structures in the natural gas sector. Besides drilling for natural gas and natural gas liquids, EQT has both gathering and transmission pipeline systems.
The company boasts an 84% institutional ownership and has received numerous price target upgrades. Its stockholders have been richly rewarded over the past year as EQT's shares have jumped over 60%. There's every reason to expect similar results moving forward.
We'll keep an eye on these five companies for additional updates on their progress drilling into America's "Secret Shale."
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