Heard Off the Street: Marcellus Shale Boom Hits Banks

Pittsburgh Post-Gazette
6 March 06, 2011
By Len Boselovic

For many of Pennsylvania's bankers, the Marcellus Shale natural gas bonanza brings the potential for new deposits, lending opportunities to the prospectors and their suppliers, and helping landowners invest their royalty checks. Moreover, banks seeking opportunities in higher growth markets could take a fancy to competitors in Marcellus Shale country.The question is: how can bank stock investors tap into that energy?

An Arlington, Va., investment banker has ideas on how to do that and they involve four Western Pennsylvania banks that, while they may not be too big to fail, are big enough to shale.

FBR Capital Markets identifies Northwest Bancshares of Warren [ticker: NWBI], Hermitage's FNB Corp. [FNB], Indiana, Pa.'s First Commonwealth Financial [FCF] and S&T Bancorp [STBA] as the banks with the biggest exposure to the potential Marcellus windfall.

PNC Financial Services Group [PNC], Western Pennsylvania's dominant bank, ranked fifth followed by First Niagara Financial Group [FNFG].

In a report issued Wednesday, FBR analysts measured the banks' Marcellus Shale potential on three factors. They rated each county based on what percentage of drilling is going on there. Then they looked at a bank's share of deposits in that county.

Finally, they considered the percentage of the bank's deposits based in counties located where drilling is underway.

Consequently, banks that have deposits concentrated in counties where there is a lot of drilling score higher than banks that do business in regions where there is not as much activity.

For example, FNB has 63 percent of its deposits in shale counties, while First Commonwealth has 96 percent. But FNB earned a higher score because it has strong market share in two counties where there is a lot of drilling -- Greene and Susquehanna in northeast Pennsylvania -- while First Commonwealth has a strong presence in Armstrong, Butler and Westmoreland counties, where there is less Marcellus drilling, the FBR analysts wrote.

Citing figures from Penn State, they estimate Pennsylvanians will collect $250 billion in royalties from Marcellus prospectors.

Drillers will spend $8 billion to $15 billion annually, based on the assumption that they will start 2,000 to 3,000 new wells annually, FBR's analysts wrote.

When you consider the jobs and other economic activity the spending will generate, there are "favorable implications for banks in terms of wealth management, deposits and lending," the analysts wrote. Banks outside the Marcellus region may also find banks tied to the boom tempting targets, they added.

According to them, bank deposits in the state's top five Marcellus counties -- Bradford, Greene, Susquehanna, Tioga and Washington -- grew 6.7 percent last year vs. 3.1 percent at banks statewide. Northwest collects $1 million a week in shale-related deposits, the FBR analysts noted.

"Many banks are telling anecdotal stories of landowners walking into branches with checks for several hundred thousand dollars," the analysts wrote.

There's also evidence that Marcellus Shale is a factor on the merger and acquisition front. In January, FNB completed its purchase of Comm Bancorp, a $653 million asset bank located near Scranton and serving six counties in northeastern Pennsylvania. FNB President and CEO Stephen J. Gurgovits said Comm Bancorp is "very well positioned to benefit from the major demographic and commercial trends associated with the Marcellus Shale."

FBR's analysts ranked S&T fifth among likely acquisition targets.

An investment strategy based around Marcellus Shale is not without risks.

FBR said its analysts consider natural gas prices, which will determine the level of drilling and the size of royalty checks. There are also considerable environmental concerns, particularly regarding the potential for contaminants from drilling wastewater making their way into water systems.

If Gov. Tom Corbett's actions during the first few weeks of his reign are any indicator, natural gas operators will be able to breathe easier than they did under former Gov. Ed Rendell.

Of the four banks FBR identified as the biggest Marcellus beneficiaries, it gives an "outperform" rating to Northwest and FNB, meaning the firm expects the two stocks to outperform peers over the next 12 months. FBR forecasts First Commonwealth will perform in line with similar banks over the next year and does not rate S&T shares.

First Commonwealth was the best performer among the group last year, rising 52 percent. It was followed by FNB (up 45 percent), S&T (up 33 percent) and Northwest (up 5 percent).

Northwest has come the closest to keeping pace with the broad market in 2011, closing Friday at $12.30, up 4 percent vs. the S&P 500's 5 percent advance. FNB shares are up 3 percent, closing Friday at $10.11. S&T closed Friday at $22.32, down 1 percent since Dec. 31 and shares of First Commonwealth have fallen 11 percent over the same period, closing Friday at $6.30.

Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.