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Rice Energy Inc. brought an upsized deal to market late last week, as underwriters increased shares offered in its initial public offering to 44 million, up from the original filing of 40 million, and priced the deal at $21.00 per share, the upper end of the $19-$21 expected offering price.
On a day when the NYMEX natural gas price rose about $5 per thousand cubic feet (Mcf) for the first time in more than three years — but market turmoil saw the Dow Jones Industrial Average close down 318 points — the shares (NYSE: RICE) traded up to an interim day high of $22.50 before closing at $21.90.
In its filing, Rice says it thinks it was early in identifying the cores of both the Marcellus and Utica shales, where it holds about 43,351 net acres and 33,499 net acres, respectively. All of its production to date has been dry gas attributable to its Marcellus operations. Production in the third quarter of 2013 came to 128 million cubic feet per day (MMcf/d).
Rice expects results from its Utica drilling to be available late in the first quarter or early in the second quarter of 2014. After drilling about 1,200 feet of a lateral section in the Point Pleasant formation late last year, an initial Utica well encountered higher than anticipated bottomhole pressures (approx. 8,800 psi) and was eventually plugged.
Plans are underway for a new well, adjacent to the earlier Bigfoot 7H, with reconfigured mud and well designs intended to better manage higher anticipated pressure and gas flows. Rice thinks pressures and natural flow rates encountered in the earlier Bigfoot 7H well “indicate a highly permeable and porous Point Pleasant formation.”
KeyBanc Capital Markets analyst David Deckelbaum believes that the valuation reflected in the Rice Energy pricing, assuming it holds, has positive implications for other players in the Utica play, especially Gulfport Energy Corp. (NasdaqGS: GPOR), but also others such as Antero Resources Corp. (NYSE: AR) and PDC Energy Inc. (Nasdaq: PDCE).
Deckelbaum describes Rice as “a premier economics, dry gas growth story” in the Marcellus and Utica. In the Marcellus, he says, Rice’s superior well completions have helped result in cumulative recoveries that have significantly exceeded those of its peers. The company plans to apply similar techniques to its completion practices in the Utica, where Rice projects estimated ultimate recoveries (EURs) in the dry part of the play of 21.8 billion cubic feet equivalent (Bcfe) — more than twice that projected by Gulfport, and more than 40% greater than those of Antero, according to Deckelbaum.
Significantly, if “like-kind acreage” were reassessed using the implied dry gas valuations afforded Rice, then Deckelbaum projects an additional $20 per share potential upside in Gulfport’s RNAV (net asset value estimated based on 2-P reserves), potentially increasing his current $88 per share RNAV for Gulfport by 23%. In terms of proximity in the Utica, Gulfport is a direct offset operator to Rice in Belmont County, with the two sharing a 50,000 net acre joint development agreement.
“Should Rice’s well demonstrate the same superiority in the Utica as seen in the Marcellus, operators would be quick to emulate the completion techniques, and returns in the play would evolve in a very dramatic fashion,” says Deckelbaum, noting this would suggest “a rising tide could lift all boats.”
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