Exxon Mobil (XOM) announced that they had bought two privately held natural gas companies in the Marcellus Shale in Pennsylvania for $1.7BN, according to a story on Bloomberg. The two companies, Phillips Resources Inc., based in Warrendale, Pennsylvania, and TWP Inc. of Butler, Pennsylvania have combined reserves of 228 BCFE (billion cubic feet equivalent) so at $7.46 per MCF there’s obviously much more value here than just the proved reserves. The two companies control drilling access to 317,000 acres, so XOM is paying almost $5,400 per acre.
We remain invested in several natural gas E&P names, including Range Resources (RRC) which is now almost exclusively focused on the Marcellus Shale. We like natural gas because it’s cleaner than other fossil fuels, currently much cheaper and available domestically rather than overseas. RRC’s proved reserves of 4.4 TCFE works out to $1.93 MCF based on its current market capitalisation of $8.5BN. They have substantially more in resource potential, perhaps as much as 50 TCFE with half of that in the Marcellus. RRC holds drilling rights on 2,078,000 acres across three regions (790,000 in the Marcellus) and although this suggests the price per acre paid by XOM is comparable to that implied by RRC there are too many variables to draw any conclusions.
The latest breakdown in discussions at OPEC simply reinforces the vulnerability we have to Middle East control over our energy prices. Iran’s public disagreement with Saudi Arabia over increased production no doubt relates to their competing interests over Bahrain, whose Shia-Muslim protests were recently put down by the Sunni-Moslem minority aided by Saudi military forces. Iran’s geopolitical objectives are impacting the cost of gasoline in Kansas.
The FT also ran an interesting article noting that solar power will soon start to be competitive with gas-fired electricity generation at times of peak usage. First Solar (based in sunny Arizona) expects to provide solar-derived electricity to southern California utilities at 10-12 cents per KWH, a price at which they believe they can be profitable even without current Federal subsidies. Another step on the road away from fossil fuels.
Disclosure: Author is long RRC
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