Seeking Alpha
Long/short equity, special situations, growth, momentum
Profile| Send Message|
( followers)  

Utica Shale Players 3rd Quarter Conference Calls Update

Those of you who follow us know that we were among the very first to write about the vast potential of the Utica Shale (starting with our August 1, 2011 article - accessible HERE). We have subsequently updated our Utica outlook and profiled four different leading Utica Shale players.

This is our fifth compilation conference call article. We believe that conference calls are an invaluable source of information and often give "color" that cannot be obtained elsewhere. Therefore, we are once again sharing our notes relating to the Utica Shale from the recently concluded third-quarter conference calls of Chesapeake Energy Corporation (NYSE:CHK), EV Energy Partners LP (NASDAQ:EVEP), Gulfport Energy Corporation (NASDAQ:GPOR), PDC Energy, Inc. (NASDAQ:PDCE) and Rex Energy Corporation (NASDAQ:REXX). To that end…

Chesapeake Energy Corporation

The entire Chesapeake conference call can be accessed HERE. Chesapeake reminded us again that it is the leading leasehold owner, driller and producer. Chesapeake has 13 operated rigs currently working to evaluate its one million plus net acres. In terms of number of rigs drilling, the Utica is the second most active of Chesapeake's key plays (behind only the Eagle Ford).

Chesapeake continues to focus capital on the core of the wet gas area inside its joint venture with Total. To date, the joint venture has drilled 134 wells in the Utica, however only 32 of those wells are actually producing (mostly due to midstream constraints).

Chesapeake continues to drive down drilling costs while refining completion techniques. Chesapeake expects to deliver excellent returns in the Utica and believes that its acreage position will support more than 4,000 wells in the Utica Shale over the next couple of decades.

In the Q and A session, Chesapeake stated that it feels it has a good handle on the "core of the core" of the Utica and feels it owns it in Columbiana, Carroll and Harrison counties. Chesapeake's Utica wet gas acreage is between 300,000 and 400,000 acres out of its one million plus acres. Chesapeake executives remain "thrilled" with the Utica and think the results are as good as any play in the country. Results will continue to lag as everyone in the play is waiting on midstream build out to occur - a process that will extend into 2014.

Chesapeake anticipates gas prices will become attractive enough during 2013 to get some interest in a joint venture on the Utica dry gas acreage (it reminded us that it has had some great dry gas wells in the dry gas portion of the play).

EV Energy Partners LP

The entire EV Energy conference call can be accessed HERE. EV Energy is well along in its Utica Shale monetization process. Bids were due in October and several bids were received. EV Energy is very confident that it will reach an agreement and remains comfortable that it will be able to close a transaction this year at least on the 100,000 net acre operated package.

Although time is short, EV Energy thinks the Utica transaction will close this year since it is primarily a land transaction with very little environmental due diligence. EV Energy envisions a closing with post closing due diligence (primarily title issues).

EV Energy stated it was not at liberty to discuss much regarding the Utica activities because of the sale process. Regarding the Total/Chesapeake/Enervest/EV Energy joint venture in the wet gas window it has 13 rigs in operation now and will have 15 rigs working next year when the joint venture expects to drill over 200 wells. The joint venture continues to see improvement in drilling efficiencies.

EV Energy has two investments in Utica midstream assets - a 9% interest in Cardinal Gas Services (low pressure gas gathering) and an 8% interest in Utica East Ohio Midstream with an option to go to 21%. If the company elects to go to 21% in Utica East Ohio, it expects to have $320 million invested in the two Utica midstream assets over the next four years. The assets are currently generating positive cash flow (small but growing).

In the Q and A session the company reiterated that it could not say much until it has a definitive agreement. Jefferies is conducting the sale process and management says that Jefferies has had more interest in the Enervest/EV Energy sale than any shale deal it had ever done (and Jefferies has arranged about 80% of all shale deals).

EV Energy acknowledged that the non-operated package will probably not close this year and was likely to close in the first half of next year. The data room for the non-operated package is open and has activity.

EV Energy explained that the reason the Utica sale is essentially a "land deal" is because EV Energy is retaining all rights to the producing Clinton and Knox formations and is simply selling drilling rights below those two formations.

Lastly, management told us that the Habrun well is now 120 days into its dissipation period. EV Energy feels like 120 days to a little longer is what it is testing, so we should have results from that well soon.

Gulfport Energy Corporation

The entire Gulfport conference call can be accessed HERE. Gulfport once again had the most exciting and informative conference of the Utica companies that we follow. Gulfport stated that based on its interpretation of the rock properties, the pressure regime and the product phased windows that Gulfport believes the position in the Utica could be as good as the best part of the Eagle Ford based upon overall productivity and economics. During the quarter Gulfport spud 5 gross wells in the Utica Shale with 2 gross wells completed and in the resting period at the end of the quarter, 1 gross well awaiting completion and 2 gross wells drilling.

Gulfport released the results from the BK Stephens 1-16H well, which tested at a peak rate of 1,224 barrels of condensate per day and 6.9 million cubic feet of gas per day. Assuming full ethane recovery the total rate was 3,007 barrels of oil equivalent per day. Note that this was achieved with only a 30-day rest period (the well has now resumed resting and will be retested again in another 30 days.)

Gulfport has encountered some delays in bringing its Utica wells into full production due to delays on the midstream side of the equation. Gulfport is in daily contact with MarkWest and believes first sales will begin on the Boy Scout and Wagner wells later this month and further believes that the gathering infrastructure will reach across the majority of the wet gas acreage in Harrison, Belmont and Guernsey counties by the end of the first quarter of 2013.

During 2013 Gulfport plans to continue running two rigs through this winter and then anticipates adding a third rig in early March and then likely add another rig every two or three months thereafter peaking at an exit rate of five to six rigs. Gulfport has budgeted $215- $225 million to drill approximately 50 gross wells/25 net wells during 2013. In wrapping up its prepared comments Gulfport called the Utica development "a once in a lifetime play" and called it a "game changer" for Gulfport.

In the Q and A session Gulfport disclosed that it added 3,000 gross acres in the Utica and continues to be interested in "bolt on" acquisitions. The cost was about $6,000 per acre for the acquired acreage it announced.

Gulfport is currently drilling Utica wells 11 and 12 and expects to drill two more prior to year end for a total this year of 14 wells and it expects all 14 wells to be producing by the end of the first quarter next year. The company expects a 1/3,1/3,1/3 production split between oil, liquids and natural gas.

Regarding permitting, Gulfport has not encountered any problems and thinks the Ohio regulators have been very cooperative. Gulfport is working 40-50 locations presently and has identified another 140-150 locations. Most of the wells Gulfport drills next year will be for holding acreage so they will be spread over their entire Utica acreage position.

PDC Energy, Inc,

The entire PDC conference call can be accessed HERE. PDC stated in prepared remarks that it continues to believe the Utica Shale play has the potential to be a world-class play and that the PDC acreage is in the key liquids-rich fairway of the play. PDC has now secured with clear title its entire 45,000 acre position with the majority in the liquids-rich window.

PDC drilled and completed its first horizontal Utica well during the quarter in Guernsey County, Ohio. This well is currently in its 60-day resting period. PDC also drilled a second horizontal Utica well, which is awaiting completion. PDC will restart drilling in the first quarter of next year. PDC expects to release data from its flow test when it becomes available - the test should start around Thanksgiving with results available in December. Completion of the second well is scheduled for next month.

In the Q and A session PDC said it has very high expectations because offset operators have reported very encouraging results in Guernsey County. PDC has allocated $50 million for Utica drilling next year but will be flexible if results look good. All Utica wells from now on will be horizontal. The first well next year will be an offset and then at the end if the first quarter or start of the second quarter PDC will start drilling in Washington County, Ohio. Currently, PDC is negotiating an option for a rig for the second half of 2013 as its first rig is only available for about 6 months.

Regarding Utica well costs they ran about $9 million for the first two horizontal wells and expect the same for the five planned wells next year. Eventually they expect costs to decline to about $7.5 million per well.

When asked PDC stated that there have not been any drilling results from the southern part of Washington County yet just leasing activity. Part of that was attributed to delays with road use agreements. At any rate PDC expects to drill in Washington County in April of next year.

Rex Energy Corporation

Rex placed into sales its first Utica well - the Brace#1-H in its Warrior North prospect. The well did 1,008 barrels of energy equivalent per day on a five-day sales rate. The 30-day sales rate was 731 BOED. The company was encouraged by the results. Also, during the quarter Rex completed drilling all three planned wells on the Warrior South prospect. Rex will frac stimulate the wells this month and will utilize its "super frac" completion methodology (which it tested on the Brace #1-H well). Note that in the Butler operations the "super frac" technique has resulted in a significantly better decline rate. Rex also used micro seismic to analyze the frac job on the Brace well and the results showed it was superior so it will use it on all future wells. Rex will then move the rig back to the Warrior North prospect and drill the first of a two well pads at the G.Graham location. Rex also announced it reached its goal of 20,000 acres in the Warrior prospects.

Rex is currently in discussions with midstream operators and will update the market before year end regarding Warrior South.

Rex calculates that it has 70 net drilling locations in the Warrior North prospect and noted that it added 800 net acres at Warrior South. Rex further noted that it had just recently reached total depth on the Guernsey 2-H well. Completion activities should start this month on that well.

In the Q and A session it said there was a chance that all 3 Warrior South wells could be completed by year end and that the wells should be into sales by the end of the first quarter (hook up line is still under construction). Rex stated that all of the wells will have a 60-day rest period. Rex plans to run a one-rig program next year and drill four wells in Warrior South and eight-nine wells in Warrior North.

Rex stated the lateral length of its Utica wells (shorter than most other reported results) is driven by the size and shape of its acreage. Rex is still looking to add additional acreage at Warrior South

Finally, Rex noted that the Brace #1-H is choked back and that while the cost of the Brace#1-H was around $9 million that it looks to drive that cost down in the future.

In conclusion, it was another exciting and informative quarter of developments in the Utica Shale. The play appears to be realizing its potential of one of the most productive shale plays. We think it is clear that both the dry gas and wet gas windows of the play will meet or exceed expectations and we look forward to results from the largely untested oil window.

Source: Utica Shale Q3 Conference Calls: The Movers And Shakers