Those of you that 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. We have subsequently updated our Utica outlook and profiled four different leading Utica Shale players.
This is our sixth Utica Shale compilation conference call article. We continue to 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 fourth 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
Chesapeake's entire conference call may be accessed HERE. Chesapeake reminded us that it has captured the industry's largest acreage position in the Utica and announced that to date it has drilled 184 wells of which 45 are currently producing. Chesapeake continues to focus drilling efforts in the wet gas window inside its joint venture with Total Chesapeake is projecting average EURs per well of 5-10 Bcfe depending on the area and phase of the play targeted. Production last year was fairly minimal due to infrastructure constraints. This year Chesapeake anticipates a significant ramp reaching an exit rate of perhaps 55,000 BOEs per day (net to Chesapeake). Spud to spud times- cycle times have decreased 37% year over year and are now down to 22 days. Average drilling and completion costs are down 27% to around $7.5 million per well (with a lateral around 5,000 feet). Chesapeake highlighted a Carroll County well (the Coe 1H) that it recently drilled with a 24 hour IP of over 2,200 BOE per day with a liquids cut of 33%. Despite several questions, the company would not discuss oil vs. gas vs. NGL percentages or depletion rates saying it was just too early to tell. Chesapeake is attempting to drill as close to infrastructure through year end as it can. The remaining drilling carry from Total was approximately $1.15 billion at year end 2012 and it is anticipated that it will be maxed out by year end 2014. Chesapeake pronounced that so far it was very, very pleased with the Utica play.
EV Energy Partners, LP
The entire EV Energy conference call can be accessed HERE. EV Energy started its conference call with an explanation of where it stands with its delayed monetization of the Enervest/EV Energy operated Utica land package. The company disclosed receipt of one bid on the overall core position, multiple bids on four packages and some individual bids on some of the counties. Without providing details, the company said it was offered some exchange properties but that the due diligence revealed that the EV Energy valuation was below the expectations of the part(ies) offering the properties. Therefore, that potential deal or deals was terminated and the company then reverted to all cash offers with the idea that the company could subsequently complete a 1031 tax deferred exchange through either Enervest drop-downs or third party acquisitions. EV Energy is currently negotiating with one party on a large transaction for most of the counties and has reopened negotiations on two northern counties with multiple parties. Additionally, the company continues to get offers for individual counties and now have not ruled that out depending on price. Having been burned on its previously much too optimistic deal deadline, EV Energy offered new deal deadline guidance of from one month all the way to year end. If the entire 100,000 net acre operated Utica position is sold, it will still leave EV Energy with over 70,000 net Utica acres. EV Energy stated its plan for the retained acreage is to monitor industry development in and around its acreage positions and then strategically drill and/or monetize as appropriate.
EV Energy provided some "color" on the value of the overriding royalty interest that it will retain on roughly 880,000 gross acres of Utica shale properties in Ohio. While cautioning that it was early in the Utica development EV Energy thinks the ORRI could generate $50 million of EBITDA per year within five years. The company stated this assumption is based on only 75% of the wet window being developed under modest development conditions and using current type curve economics and is based on the drilling of about 60 wells per year on the acreage. This assumption assigns zero value for all acreage located outside if the wet gas window. Putting this in perspective, the company said Chesapeake is drilling 370 wells in just the next two years so its projected $50 million could prove conservative.
Regarding EV Energy's Utica midstream investments, the company pointed out that all existing wet gas pipelines are full awaiting and it feels comfortable that its Utica East Ohio and Cardinal midstream Utica investments will generate $50 to $70 million per year in EBITDA after they are up and fully running by mid-2014.This year Utica midstream capex is estimated at $230-250 million.
EV Energy did not give any real information about the additional Utica acreage that the company acquired other than it was located in "east central Ohio". Likewise, regarding the performance of the Habrun, Frank and Cairns wells we did not learn anything about their performance since the initial press releases as two of them are removed from infrastructure and the third is flowing into a pipeline that is restricted with back pressure issues.
Gulfport Energy Corporation
The entire Gulfport conference call can be accessed HERE. Gulfport secured its basic Utica footprint in 2011, shifted toward drilling and de-risking the play last year. With results in hand and having solidified its thesis of the Utica's exceptional potential Gulfport firmed up gas gathering and processing arrangements with MarkWest. By virtue of Gulfport's substantial acreage position in the core of the play Gulfport secured anchor tenant status in a high value condensate-gathering stabilization splitting system. With that capability, Gulfport's condensate will be processed into high quality diluents for sale in the Canadian market (to be mixed with heavy oil produced from tar sands) and the left over stabilized heavies can be transported down the river to the highest value opportunities. The diluent demand in Western Canada for heavy oil blending is such that it is currently priced at a 15% premium to WTI. Likewise, the Canadian demand is projected to increase from 140,000 barrels a day in 2011 to 450,000 barrels per day in 2025. With positive drilling results, extensive science under its belt and the ability to market its products, Gulfport took advantage of an opportunity to further consolidate its core Utica acreage position making a series of acquisitions that effectively doubled its interest in the play. As midstream facilities come onstream, Gulfport forecasts by mid-April its Utica production will be greater than the total of all of its other existing areas. Gulfport reiterated that the Utica is its primary forward focus.
During 2012, Gulfport spud a total of 14 gross wells in the Utica Shale, with two wells producing, eight wells completed and in their resting period, 2 wells waiting on completion and 2 wells drilling at year end. Gulfport has just added a third horizontal rig and Gulfport has added two top hole rigs. The plan is to accelerate the 2013 drilling program in the Utica by operating top hole rigs alongside the horizontal rigs. The top hole rigs are cheaper to operate and will allow most of the vertical section of each well to be drilled before a horizontal rig ever comes onsite. The daily savings is over $25,000 per day on the top hole work versus the big horizontal rigs.
During 2013, the drilling schedule has been formulated so that Gulfport will be able to have wells online and flowing into sales as quickly as possible i.e., all wells will be drilled at locations that are currently on a pipeline in service or that will be in service soon.
During the Q and A session, Gulfport stated that the Wagner well was on production for 129 days last year when it averaged 5.2 million cubic feet of gas per day and 95 barrels of oil per day. In January, after the company got into the processing plant, the average went to 5.4 million cubic feet per day and 105 barrels per day while the data available for February had the numbers up to 6.4 million cubic feet of gas and 110 barrels of oil per day. Gulfport also stated that based on the lines published by Chesapeake that 70% of the Gulfport acreage is in the wet gas window, 17% in the dry gas window and 13% in the oil window. Most of the drilling this year will be pad drilling - typically drilling 2 wells of the same location at once. Regarding resting periods, Gulfport is still using 60 days and that has been incorporated into its production forecasts but the company thinks that ultimately the number may end up at 30 days - the company continues to work the science so it can arrive at an optimum result. Also during the Q and A period Gulfport went into an amazing description of the science/technology it is planning to employ on the upcoming Darla well (which will be located just north of the Wagner well). The Darla will involve drilling 3 wells of one pad in a sort of fan array. Gulfport will use and test three different frac designs (one with 300,000 pounds of sand per stage, one with 550,000 pounds of sand per stage and one with Carbo Ceramics in each stage). Gulfport will also use radioactive tracers so that after fracing it can see where the frac actually went. Then the company will be putting in chemicals that will allow it to see if there is any communication between the wellbores and between the laterals. Additionally, the company will be inserting optic fiber that will allow it to tell from temperatures which intervals are producing. Gulfport will also do microseismic and use pressure transducers. The cost of just the pressure transducers and optical fiber is about $600,000 per well.
PDC Energy, Inc.
PDC Energy's entire conference call can be accessed HERE. PDC reviewed the fact that it completed the acquisition of 45,000 net acres in the Ohio Utica last year for approximately $2,000 per acre. The company believes that was an excellent entry point from a cost standpoint compared to recent transactions. PDC continues to believe that the Utica play has the potential to be a world class shale development.
In the quarter, PDC announced the Onega Commissioners 14-25H well on its Guernsey County Utica acreage which had an initial production rate of 1,800 barrels of oil equivalent per day with a 79% liquids mix. More recently, PDC announced the Detweiler 42-3H well with an initial production rate of 2,197 barrels of oil equivalent per day. The latest well was tested on a smaller choke and was 4 miles east of the Onega well and had a liquids mix of 75%. Currently, PDC is drilling on the Stiers three well pad in southern Guernsey County and PDC expects to complete drilling those three wells sometime in April. PDC will then move its rig to the Garvin 1H location in the southern part of the PDC acreage at the northern portion of Washington County. After drilling the Garvin (which should spud in April) the company will drill the Maxwell well just to the west.
A question was asked about the shorter laterals that PDC used in its first two horizontal Utica wells and the response was that it involved lease line issues. PDC would prefer longer laterals and is working on pooling acreage. The current wells should have laterals of around 5,000 to 6,000 feet. PDC also announced it would be sharing production and performance data for the Onega well from mid-January onward at Analyst Day in early April. Another question was asked regarding whether it would consider going back to the market with its Utica acreage at this point and the answer was no, that's off the table now from what the company has seen and the results that it has obtained and expect - therefore although PDC has a little more debt on the books than it would like- it has very strong liquidity.
Rex Energy Corporation
The entire Rex Energy conference call can be accessed HERE. Rex reported solid results from its liquids focused Ohio Utica program in 2012. The total net acreage for the two Warrior prospects is now topped off at 20,000 acres. At the time of the conference call Rex's Brace West pad in Ohio was temporarily shutdown due an incident wherein one of Rex's drilling contractor's employees was fatally injured.
An update was provided on the Warrior North Utica program. The Brace1H which was placed into sales last September is producing quite well. The most recent 90 day average rate was 515 BOE and the most recent 60 day average rate was 597 BOE. Rex has completed the drilling of two wells on the G. Graham pad and Rex is currently fracture stimulating both wells. Both wells will be shut in for 60 days following completion and placed in to service in the second quarter of this year. For the calendar year 2013, Rex plans to drill seven wells in the Warrior North area and complete five wells while placing four wells into service.
At the Warrior South Prospect area Rex drilled and completed three wells during 2012. The wells have been shut in since completion and will be put into sales as soon as the necessary infrastructure is in place which is projected to be this June. Rex will drill and complete 4 to 5 wells at Warrior South during 2013 on its next pad (the J. Anderson unit). In total for 2013, Rex plans to bring on 11 wells in the Ohio Utica and have a total of 12 wells producing there.
Rex is still using $8.8 million as an estimated per well drilling cost based on its initial wells but announced it has significantly reduced drilling time and costs. Rex's first five Utica wells averaged 42 days drilling on location for an average 3,480 foot lateral. The last four Utica wells have been drilled on average in 23 days even though the length of the laterals has increased to an average of 4,177 feet
During the Q and A session Rex was asked about down spacing on its Utica acreage but responded that it is too early to tell as the company continues to experiment with different stage spacing differences as well as lateral length separation. Rex thinks it will need 6 to 9 months worth of production data from a couple of its 2, 3, 4 and 5 well pads before it can make a determination about downspacing. Flow test pressures appear to be a little stronger in the South area than the North. Regarding a possible increase in its Utica acreage position, Rex stated it continues to look at opportunities every day. However, the majority of the land in the counties where Warrior North is located is leased up. Rex will attempt to pick up some expiring leases but doesn't think that will be material. The big opportunity is to do some acreage trades with area lease holders so to optimize layouts for laterals or to pool acreage to form units with other operators. Finally, it was noted that all of Rex's Ohio Utica wells will be include a full "Super Frac" design.
In closing, it was another exciting and informative quarter of developments in the Utica Shale. The play appears to be realizing its potential as one of the most productive shale plays. The wet gas window continues to show impressive results and with the needed midstream improvements coming onstream in the near future, we think the public will be quite surprised with the production numbers that the various participants will be showing. While the oil window remains a wild card the wet gas window has largely been de-risked. We think companies such as Gulfport (of which we are long) that have outsized Utica exposure will soon be accorded a premium valuation as reported production volumes soar in the second half of 2013.