“The Secret of the Marcellus Shale” Matt Badiali

By Travis Johnson, Stock Gumshoe, September 23, 2008

If you’re on the email lists for Stansberry or Agora or a half dozen other investment newsletter publishers, you’ve probably seen this ad — it’s for the S&A Oil Report, and it tells us that, for a wee subscription fee, the editor of that newsletter will tell us the secret that he didn’t tell Brian Sullivan at Fox News.

“‘What I didn’t tell Fox News about the biggest money-making opportunity in America for the next 12 months’
~Matt Badiali, U.S. Geology Veteran”

Well, Matt didn’t tell me what his secret is, either — but thankfully, he wanted to entice you to subscribe — so he included just enough juicy detail in his ad that the Gumshoe will do some digging and get the name of this stock for you. Stay with me for a minute and I’ll share.

Here’s some of the ad, in case you missed the excitement:

“On July 28th Fox News asked me to talk about the biggest U.S. natural resource discovery of the last 32 years.

“I told them everything I know… EXCEPT for the one piece of vital information that can make you a fortune in the next 12 months.

“He saw an academic paper I wrote about a unique piece of land in the Appalachian Mountains…

“A 54,000 square-mile swath stretching from West Virginia to New York…

“Brian wanted me on the show because of my experience as a geologist. I’ve studied this area for my entire academic and professional career. I’ve probably done more research on this land than anyone else in my field. In fact, you could say, I’m the “unofficial expert” on this Appalachian discovery.”

So … this is all about the Marcellus Shale, which is a big geological formation that lies under the Appalachian mountains and in those environs, roughly running from West Virginia up through Western Pennsylvania. And the sexiest part of it right now is definitely Pennsylvania, since new technologies in the last ten years have made accessing that gas feasible and affordable.

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And Badiali does probably know quite a bit about it — to say that he has done more research on this land is a reality-stretching boast, he hasn’t even really published much as an academic and hasn’t finished his PhD as far as I can tell … there are plenty of geologists who have studied this area rigorously, and Pennsylvania is no stranger to the energy industry. The first oil boom in the United States started in Pennsylvania well over 100 years ago … it’s not a coincidence that you lubricate your engine with “Quaker State” oil. But yes, he has studied geology and he has written a lot about shale oil and gas for investors for many years. If you want a real on-the-ground scholar of this stuff, look for someone like Terry Engelder at Penn State, who released a report in January that stoked interest in the Marcellus for a lot of people. But of course, he isn’t a subscription-hawking newsletter editor, he’s a professor, so he won’t tell you about any companies you should invest in.

Badiali will — and don’t worry, we’ll get to the name in a minute.

Part of the tease for this ad is that Badiali says there’s a big release of information coming from Pennsylvania about the potential of the Marcellus Shale. He goes through the fact that the USGS did their big survey of Marcellus in 2003, and that while other states release this data almost instantly, Pennsylvania lets you keep it under wraps for five years … which would bring us to 2008.

I don’t know exactly what this potential data release is — or why it would be shocking or exciting for investors. The man I mentioned above, Terry Engelder, has been studying the Marcellus with a colleague from a New York university and released some pretty incredible information in January, and in more detail at a petroleum geologists conference in the Spring. Here’s a quote from Engelder’s website:

“The researchers said that America (U.S., Canada, and Mexico) currently produces roughly 30 trillion cubic feet of gas annually. Engelder said the technology exists to recover 50 trillion cubic feet of gas just from the Marcellus, making it a super giant gas field.”

That’s enough excitement for me — and I don’t suppose that there are big numbers of investors who will be surprised to hear that the Marcellus Shale is potentially a big deal. It’s possible that there’s some other kind of data coming out, or that Badiali was referring to this data that has already been released and just thinks there will be more detail, or more public attention coming. I have no idea.

He also quotes the Houston Chronicle says the results will stir a “…frenzy, unlike any seen in decades.”

As far as I can tell, that quote is actually from the New York Times — but it was for an article about the Marcellus Shale (you can read the article here if you like). Maybe it got republished in the Houston Chronicle, not that it matters much.

There’s more — Badiali gets a bit long-winded in in describing how important natural gas is (electricity and home use, and potential transportation use, and like many others he tries to piggyback on the attention that the “Pickens Plan” has gotten).

But really, he just wants to help you get rich on the land rush — and to do so by buying a company that’s already active in the area. Here are the clues he provides:

“They are experienced in the Appalachian area. They’re headquarters are in Pittsburgh. Their management team averages 24 years each drilling wells in and around the Appalachian Basin.

“And they’ve been quietly snatching up available wells in the gas-rich Marcellus.

“In fact, they operate over 6,600 wells in the Appalachian basin currently…

“How much natural gas is on their land? Only they know, but when the survey is announced in the coming days, the whole world will know about their potentially lucrative holdings.”

Badiali tells us that “the key to making money in natural gas is to own the companies with the most valuable land.” And in this case, the company to own is …

Atlas Energy Resources (ATN)

This is actually a pretty interesting little company — they are one of the big players in the Marcellus Shale, but they’re much smaller than Range Resources or Chesapeake or the other big gas companies who are working there and in similar shale fields.

And they’re structured sort of like a Master Limited Partnership — they pay a high dividend (a bit above 8% at the moment) that they’ve been raising consistently since going public a couple years ago. This is essentially an investment partnership run by parent company Atlas America (ATLS), which is used to fund investment in their natural gas properties. ATLS, in addition to owning about half of ATN, also manages a pipeline network, which you can also buy, called Atlas Pipeline Partners (APL, which has a bigger dividend) — this is particularly interesting because part of the problem in the Marcellus is that there isn’t enough of a distribution network yet to handle the massive volumes of gas that the companies believe they can extract. That they already have access to a pipeline network is potentially advantageous, as is the fact that their pipeline partner is investing to build the pipes to their projects so they don’t have to put it on their balance sheet.

So — is this something you want to buy? Well, it seems to me like a relatively low risk play if you believe in the potential of the Marcellus Shale and, perhaps more importantly, if you believe that we’re near a bottom in natural gas prices. If natural gas returns to the “old normal” of prices below $4, I can’t imagine that many of these deep shale formations are going to be particularly profitable — and the Marcellus shale is among the deepest. If you don’t care about the dividend, you might also want to take a look at ATLS, the parent company — and if you only care about the dividend, you might prefer to look at the pipeline partner, APL, which yields almost twice as much. ATN seems like the preferable vehicle to me, a good and growing dividend that’s covered fairly well by cash flow, and with good potential for growth if their drilling programs are as successful as many folks think.

As to that growth potential, here’s a quote from the CEO on the latest conference call:

“We’ve now drilled 78 vertical Marcellus Shale wells and one horizontal, with 69 already producing into a
pipeline. And we plan to drill at least 80, that’s 80, additional vertical Marcellus Shale wells in the next 12 months and at least a further 24 horizontal Marcellus wells by the end of 2009 …

“These future wells, especially the horizontal wells, which will be drilled through the Company’s own account as part of joint ventures involving industry partners, these future wells should contribute substantially to continued increases in Atlas Energy’s production and reserves.

“In fact, our daily production from the Marcellus Shale already exceeds that of every other company operating in this play, approaching nearly 20 million cubic feet per day of gross production at the end of the quarter, including gas produced for our managed programs.”

Atlas Energy is a popular pick — it has gotten attention from Jim Cramer in the past, and it’s well off its highs of $45 that it hit late in the Spring (you can buy it today for about $27). There are some people who believe that natural gas supplies are so high that the prices will continue to suffer, but in general I’d bet on the long term price of natural gas — it has too many advantages over coal and oil to fall too far for long, I think. I could be wildly wrong, however.

If you want to read some more about the Marcellus Shale, there’s an interesting article here from geology.com — though they did spell Engelder’s name wrong. And if you want some more boosterism about the stock, you can read this note from a Stockpickr contributor, and there are several blogger fans over at SeekingAlpha.

And while Atlas is banking on the Marcellus Shale for the lion’s share of any big boost to profits, they do have other operations — they are drilling in shale in Tennesse (the Chattanooga shale, I think), and they have an office in Traverse City, Michigan that’s working on developing some Antrim Shale properties. If you’re going to argue, as some folks do, that Atlas is severely undervalued and has a big, unappreciated chunk of net asset value hidden underground that’s not accounted for in the share price, most of that “hidden” value is in the Marcellus. The analyst from Wachovia included this valuation in a report last Spring:

“Our valuation range is based on a blend of (1) our NAV estimate of ATN’s proved reserves in Appalachia and Michigan ($16 per unit), (2) a price-to-cash flow multiple of 8x on ATN’s fee-based business ($9 per unit), and (3) $29-32 per unit of option value related to the Marcellus Shale. Risks to the units trading below our valuation range include uncertainty surrounding Marcellus Shale drilling, dependence on investment partnerships to fund drilling programs, and a decline in commodity prices.”

Before you get too excited, they pegged a mid-$50s price target based on that info, and the shares have fallen hard and fast since then, probably in large part because the commodity price of natural gas continued to collapse.

For a bit more on the negative side, you might want to think about the environmental challenges — with the Pennsylvania economy suffering the Marcellus shale players are probably in a pretty sweet spot, since they bring in a lot of money for the economy, but we’re talking about a fairly invasive and aggressive drilling ramp-up statewide, from many different players, so it’s always possible that there could be a backlash from residents or environmentalists. A fair amount of this drilling is being done in forests and in farmland, but Pennsylvania is certainly much more densely populated than some other shale areas, like the Bakken (though as far as I know the Texans seemed to do cope OK with the Barnett Shale that sits under Forth Worth).

It’s a promising sounding company that I might have to look into a bit more — I do like the high and rising dividend, and I have been toying with the idea of getting exposure to natural gas again (I held some Chesapeake Preferred stock for a couple years, but sold quite a while ago and don’t own any company in the space at the moment except for Loews, which has a small shale gas E&P division).

Whether it’s a good call for you … well, you know the drill: That’s your decision to make. It is, after all, your money. If I decide to get into this company (even if I decide to buy I would have to wait at least three days because of my disclosure rules), I’ll post a note at the Irregular site.

Happy investing.



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farley 5
farley 5
September 23, 2008 11:17 am

Looks like you will have plenty of time to get into this one at lower prices. This 1 for 5 had the monthly momentum turn negative so expect weakness for around 7 months. Spread triple bottom at $23 so you may want to see how it trades there. This is optionable but I have not had time to look at them today.

September 23, 2008 12:20 pm

This morning (9/23), there was a relatively large sale of stock at 11:12 EDT ~71,000 sh. at 27.15, looks like down for near term.

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September 23, 2008 12:27 pm

Be cautious with this one:

Shale-Gas Producers Face Regulatory Obstacles In Appalachia
3:37 PM EDT July 25, 2008

By Christine Buurma

NEW YORK -(Dow Jones)- Energy companies are flocking to Appalachia in droves,
snapping up acreage and drilling test wells in search of natural-gas deposits
buried deep in ancient rock formations.

But as concerns about the environmental impact of such drilling activity grow,
gas producers could face mounting costs as they attempt to navigate tightening
“It’s a big concern as to how quickly we can ramp up production,” said Randy
Waller, chief compliance officer for Texas Range Resources Corp. (RRC), Fort
Worth, Texas. “The process is hindered by the weakest link, whether that’s a
water-source permit or another type of permit.”

New York Gov. David Paterson signed a bill Wednesday that fast-tracks horizontal
natural-gas drilling in the state’s Marcellus Shale, a gas reservoir that also
extends into Ohio, West Virginia and Pennsylvania. But in a concession to
environmentalists, the governor directed the state’s Department of Environmental
Conservation to prepare a document examining potential environmental impacts
associated with the drilling activity. The DEC will also review staff resources
and regulatory issues that could be affected by shale-gas drilling.

Over the past few years, natural-gas companies including Range Resources,
Chesapeake Energy (CHK), and EOG Resources Inc. (EOG) have bought up substantial
acreage in the Marcellus Shale. Gas plays like Marcellus require more expensive
drilling techniques than conventional gas deposits do, but rising hydrocarbon
prices have made such ventures economically feasible.

Gas drillers in the Marcellus Shale are already facing higher regulatory hurdles
in Pennsylvania, which now has stricter requirements dealing with water use and
other drilling-related environmental concerns. Such mandates are creating
headaches for gas producers and could ultimately eat into profits if more
stringent permitting requirements result in significant production delays.

Although shale drilling has been conducted for years in producer-friendly states
like Texas, growing interest in the Marcellus Shale has brought such activity to
Appalachia for the first time, forcing policy makers to re-evaluate laws and
regulations that were designed to address conventional drilling methods.

A Water Hazard?

Geologists have said the Marcellus Shale could contain enough natural gas to
meet U.S. demand for two years. Most of the Marcellus leasing activity has
focused on Pennsylvania, which is thought to have the greatest output potential.

But environmentalists say that shale drilling can contaminate drinking water and
create other environmental hazards. A 2004 report by Argonne National Laboratory
said studies indicate that water discharged as a byproduct of gas drilling is 10
times more toxic than water discharged from oil platforms.
Shale formations like Marcellus require a drilling technique known as hydraulic
fracturing, or “hydrofracking,” which involves fracturing rock by injecting a
mixture of water, sand and chemicals at high pressure into deep wells.
Environmentalists have argued that the chemicals used in hydrofracking are toxic
and could leach into groundwater supplies.
A report released Tuesday by nonprofit news service ProPublica and public radio
station WNYC cited instances of drinking-water contamination in states where
hydraulic fracturing was conducted. Environmental permitting issues are likely
to slow the pace of Marcellus Shale development, making it more costly for gas
producers to drill there, said Manuj Nikhanj, an analyst with Ross Smith Energy
Group, a Calgary-based research firm. Producers looking to tap into the
Marcellus Shale in Pennsylvania have to obtain permits related to water use and
disposal, endangered-species protection and earth disturbances.
Regulatory requirements “are definitely going to slow [development] down,”
Nikhanj said.

Regulatory Hurdles

Groundwater contamination from horizontal wells is unlikely because such wells
are 4,000 to 8,000 feet deep, well below where most groundwater reservoirs are
found, Nikhanj said. The more pressing issue is how natural-gas producers
discharge the water after it is used for hydrofracking, he said.
“The big concern is…where is the water being taken from to [fracture]
Marcellus wells and how is the recovered frac fluid and brine being treated if
the water is being discharged back into the river systems?” he said.
Over the past year, Pennsylvania has updated the state’s drilling regulations to
address such issues. Producers must disclose where waste water will be disposed,
and specific facilities must be used to treat recovered frac fluid from the
Producers also have to disclose how much water they will use for drilling and
where they will obtain it. Separate permits are needed to withdraw water from
certain sources.
Such requirements could create significant delays for producers looking to
develop the Marcellus Shale. Pennsylvania’s approved waste-water treatment
facilities have limited capacity, which could create bottlenecks for producers.
Some regulatory agencies, such as the Susquehanna River Basin Authority in
central Pennsylvania, meet only a few times a year.

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September 23, 2008 12:32 pm

Gumshoe, I’m surprised you touched so little on The Marcellus Shales in Upstate NY (Southern Tier). I think I read you are from or lived in that area. This has been the hotbed topic for well over a year here as the big gas and oil companies had them lining up for two days with buyouts and wine and dining the locals.

However you hit on one key point. NYer’s and to some extent Pennsylvanias have been question the ecological consequences of the evasive drilling that will take place…especially on the farm lands where I will say about 45% of the drilling is and/or will be taking place. I’ll call my dad up later to get the local perspective now.

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elissa stein
elissa stein
September 23, 2008 12:37 pm

Gumshoe, the UNG does not correlate well to the price of Nat Gas–too many companies with “issues” in the UNG. ( It is just like GLD and GDX-the miners lag the metal.)
Nat Gas call options are performing well right now ( Nat Gas is at 7.922 as I write) but there would have to be a huge price increase for a sustained period for Marcellus to really perform, akin to the oil sands pricing– generally, crude has to be around $100 a barrel before oils sands make economic sense. So, there you have it. Nat Gas is still seasonal. We’re coming into the season, and there was a dip attributable to recent hurricane activity, so maybe there will be a short term pop. Or not!
Currently, it takes 4 hours to replace( the gasoline equivalent of ) enough Nat Gas to go 50 miles ( see the FuelMaker website for the PHIL product- the at- home kit so you can fuel up in your garage overnight). I just can’t see any of this happening quickly. Those Phil kits are pretty costly, too. Currently if you have a car that s still under warranty, doing a conversion to nat gas voids your warranty. So, the infrastructure doesn’t exist, despite Pickens proposal and fabulous website. (Personally, I think he’s got the USA’s interests at heart, with all his billions and at his age, he may never see the substitution of Nat Gas for Crude products during his lifetime).
Furthermore, the options on Atlas have very low volume. All in all, there are safer longer-term trades on Nat Gas, besides CHK (which has it’s own challenges) and XTO ( which seems to be the street’s darling at the moment.) Just my opinion–this is one to watch, for years, maybe. For awhile, those Agora guys were touting Deltic Timber as a shale play, too. It’s true, Deltic owns a lot of land w/ shale. But this is just so much unrealized possible potential–(Deltic’s still a timber company., and Marcellus has a long way to go.)

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September 23, 2008 3:17 pm

I recall reading that CHK was fighting PA over releasing it’s proprietary fracture formulation. (PA wouldn’t let CHK continue extracting until the fracture formula was released and CHK wouldn’t release it.)

September 24, 2008 3:09 am

I was a subscriber to the Oil Report and bought shares of Kazakhstan explorer CHAR on Badiali’s recommendation. It was doing good until the Russians took a controlling interest and maneuvered the company into a fire sale after which they bought the company whole. I was lucky to break even. Then Matt touted much the Uinta and Pisciene Basin Shale. Nothing happened yet. Question: will Marcellus follow the same footing? Is there a positive difference between the two in favor of Marcellus?

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September 25, 2008 1:10 am

Came across your webpage while doing some google-com research (trying to determine who it is that has, in the past few weeks, been making lease agreements re: gas/oil rights in my home county, Marshall County WV — sorta the next-door neighbor to Washington & Greene Counties in PA). Anyway . . .

Are you sure Atlas is the “secret”? I mean: CNX Gas is also headquartered in Pittsburgh PA and, if I’m not mistaken, CNS is into coalbed methane as well as the Marcellus (in Greene County PA, IIRC). Oh, well . . .

[**sigh**] Back to google.com! Still haven’t found out who’s making those gas/oil leases in my own home county!

September 25, 2008 1:14 am

Oops! Spelling error in sixth line above . . . change “CNS” to “CNX”.

Sorry ’bout that!