A Million Acres of Paydirt?

THE NEXT BIG THING IN U.S. ENERGY EXPLORATION will be the Marcellus Shale, a vast, underground layer of rock stretching from upstate New York down through Pennsylvania and into Ohio and West Virginia. By some estimates, this formation contains 50 trillion cubic feet of recoverable natural gas, enough to meet two years of gas consumption for the entire U.S. That kind of volume could go a long way to helping the country cut its dependence on foreign oil.

Enter Range Resources (RRC). A modest-sized Texas exploration outfit, it was smart enough to start buying up land rights in Marcellus Shale in 2004, when prices were still relatively cheap. It now controls some 900,000 acres of prime Marcellus soil, more than any other energy company operating in the region. If Range's drilling proves as successful as fans hope, the company's revenue could surge far, far beyond the current $1.3 billion a year.

"We are a relatively small company with a tiger by the tail," Chief Executive John Pinkerton tells Barron's. "If the tiger ends up being what everyone says it will be, our company will be 10 times bigger than it is."

All of which makes Range's stock singularly tantalizing. In the next year alone, bulls say, the stock should climb about 36%, to 65. And it could keep rising in leaps and bounds for years.

Range, however, must first overcome some real obstacles. Most notably, Congressional Democrats are seeking to regulate the hydraulic process used to force gas out of shale. The process, which involves forcing sand, water and chemicals through a pipe, is called "fracking," and industry groups insist it is time-tested and safe. But environmentalists contend fracking threatens water quality and plant life.

Embarrassingly for Range, just as the debate was heating up recently, the company reported a Pennsylvania pipeline leak that killed flora and fauna. The industry can't afford many more incidents like that. If fracking foes gain the upper hand in Washington, Range and its rivals could well run into permit delays and, consequently, earnings shortfalls.

But the company's stock managed to hold firm as the Pennsylvania saga unfolded. And believers in the promise of the Marcellus maintain that any final action by Congress will take the form of reasonable restrictions rather than flat-out prohibitions.

"Public policy has to balance cheap, domestic energy with the potential 1% risk that fracking is going to damage the water supply," says G. Warfield Hobbs, a Connecticut geologist and energy consultant with interests in the Marcellus.

For now, the biggest influence on Range's stock is the price of natural gas. Just last Thursday, the shares jumped 5% as gas prices rallied. Depressed demand in recent months has lowered the gas price to near $4 per million British thermal units, but the futures market is projecting prices will rise to near $6 by December as an improving economy and curtailed drilling help reduce the current oversupply. That could sharply boost Range's earnings, and not just from the Marcellus.