Fayetteville, Haynesville Next In Line For MLP Portfolios, Says BMO's Hough

As for the Marcellus, it's developing rapidly, but it's still a good ways from play maturation, he adds.

Amongst resource plays, next in line for advancement, since the Barnett, into oil- and gas-producing MLPs' portfolios is the Fayetteville shale play, followed by the Haynesville, says Jonathan Hough, director, energy investment banking, for BMO Capital Markets.

On a scale of resource-play maturity-that is, its advancement from science experiments and early exploration to more of a methodical, manufacturing mode-the original shale play, the Barnett in the Fort Worth Basin in North Texas, is the most advanced, Hough notes. He presented to attendees at Hart Energy's workshop in Pittsburgh on Marcellus and Utica finance and M &A, preceding the fourth annual DUG East conference.

Already, EV Energy Partners LP and Atlas Resource Partners LP have bought into the Barnett, which was proven by Mitchell Energy & Development Corp. in the late 1990s. Also, Fort Worth-based Quicksilver Resources Inc. plans to form an MLP, Quicksilver Production Partners LP, for the purpose of dropping into it its developed Barnett portfolio.

Meanwhile, the Fayetteville in Arkansas that was founded by Southwestern Energy Co. in 2004, hosts one MLP, Vanguard Natural Resources LLC, already. The Haynesville in northwestern Louisiana that was proven in early 2008 by Chesapeake Energy Corp., hosts Memorial Production Partners LP.

MLPs (master limited partnerships) are built to produce oil and gas-paying out earnings as pre-tax distributions to investors-and exploit known new-well targets, rather than to explore for oil and gas as do traditional E &P companies. "Basin maturity is critical to meet the MLP model," Hough says.

Next on the MLP course? Far along, but still needing more capital-intensive investment and further de-risking, are the Marcellus, Bakken/Upper Three Forks , and Eagle Ford condensate window, Hough says. These remain best suited to traditional E &P companies, including slightly lower-risk-taking public-equity-backed E &Ps.

"The Marcellus is still in early-stage development versus the Barnett, which has matured," Hough says. However, it is advancing much more rapidly. "It took more than six years for Barnett production to grow from 1 Bcfe (billion cubic feet equivalent) a day to 5 Bcfe a day." Meanwhile, Marcellus grew to that rate in only two years of exploration and he estimates there are still 100 years of drilling left to be done in the rock at the current pace. In contrast, drilling inventory in the Barnett has declined to a 30-year supply, particularly at the current-gas-price pace.

Another distinction is that Barnett wells hit their MLP-appropriate decline rate-some 10% a year-in their fifth year of production, while Marcellus wells might not reach this until their seventh year.

And, existing Marcellus producers are not motivated to sell: Keeping exploration companies at work there-rather than casting off this inventory to MLPs as a means of funding a next great play-is that they can better afford to do this