The Utica Shale and its vast promise burst upon the lexicon of oil and gas E&P investors last Thursday night when industry leader Chesapeake Energy Corporation (CHK) issued its second quarter earnings report. Included in the report was an announcement by Chesapeake of a major new liquids rich discovery in the Utica Shale in Eastern Ohio.
Chesapeake’s report went on to say that, “based upon its proprietary geoscientific, petrophysical and engineering research during the past two years and the results of six horizontal and nine vertical wells it had drilled, Chesapeake believes that its industry leading 1.25 million net leasehold acres in the Utica Shale play could be worth $15-20 billion in increased value to the company.” Chesapeake is currently drilling in the Utica Shale with five operated rigs and will increase that to 16-20 rigs by year-end 2012. Chesapeake is currently conducting a competitive process to monetize a portion of its Utica Shale leasehold position and stated in its conference call last Friday that they expected the Utica Shale acreage to significantly increase in value as they continue to drill and derisk the acreage.
Chesapeake is an industry leader but with a market cap of over 20 billion and 635 million shares outstanding, it's difficult to move the needle and we think investors might like to know more about the Utica Shale and other E&P companies that may be more leveraged to the Utica.
First, the Utica Shale is a huge rock unit with a large footprint that basically overlaps the entire Marcellus Shale. The Utica is much deeper than the Marcellus ranging from up to 7,000 feet deeper in the eastern portion to around 2,000 feet deeper in the Eastern Ohio portion (which appears to be the hotspot of the play). The Utica Shale has a much greater geographical footprint than the Marcellus, and, in fact extends into Ontario and Quebec at its northern boundary.
Range Resources (RRC) has a good deal of exposure to the Utica Shale. Range is an innovative E&P company that may not be as well known to most investors as Chesapeake; however it was Range that drilled the very first horizontal well in to the Marcellus Shale a few years back. Range was also perhaps the first company to brief investors on the vast potential of the Utica Shale. The company gave a good discussion of it in their March 1st conference call. Range CEO John Pinkerton calls the Marcellus/Utica Shale a “triple play” or three plays in one. In other words, as we earlier explained, if you are involved in the Marcellus Shale play you are a defacto Utica Shale play because the Utica underlays the entire Marcellus and the Upper Devonian shale is a shallower zone above the Marcellus. Range expects to have a significant cost advantage in developing the Upper Devonian and Utica because they will be drilling where they already have been drilling Marcellus wells. Therefore, the synergies i.e., the sunk costs for acreage, roads drilling pads, gas lines etc should be about one third less than otherwise. Range has 700,000 net acres in the Marcellus and sixty (60%) per cent of that has potential for Upper Devonian and Utica Shale.
Gulfport Energy (GPOR) is a well run independent with operations in several E&P hotspots such as Texas, Louisiana and the Niobrara Shale in Colorado as well as in the Canadian oil sands. Several weeks ago Gulfport did a 3 million share secondary to raise approximately 90 million in large part to fund their Utica Shale initiative. Gulfport’s acreage is all in the prime liquids rich portion of the play i.e., Eastern Ohio. Gulfport will serve as operator of its acreage and has commitments that would bring its acreage position to 110,000 gross (55,000 net) acres.
CONSOL Energy (CNX) is a leading diversified energy producer and is generally thought of as just a coal producer but they are also the leading natural gas producer in the eastern United States (largely based on their 2010 acquisition of the Dominion Resources operation). CONSOL controls 675,000 net acres in the Marcellus and another 200,000 net acres in the Ohio Utica Shale. CONSOL has drilled and successfully tested one vertical Utica completion this year in Ohio and plans six more Utica wells before the end of the year.
Talisman Energy (TLM) is one of Canada’s largest independent oil and gas producers. Talisman has a global footprint and has a major Marcellus Shale operation here in the States (primarily Pennsylvania and New York) with approximately 225,000 net acres. Talisman also controls a further 756,000 net acres in the Utica Shale in Quebec.
EXCO Resources, Inc (EXO) has 140,000 net acres in the Marcellus Shale primarily in Pennsylvania and West Virginia some of which appears to have liquids rich potential.
Finally, EV Energy Partners (EVEP) is an Enervest upstream MLP with a current yield of 4.30% and exposure to Utica Shale upside. EV Energy Partners is probably our favorite Utica play.EV Energy has over 600,000 gross acres in Ohio – the vast majority of which is in the strategic eastern portion of the state. Their net Utica Shale exposure is 150,000 net acres plus an overriding royalty interest on another 80,000 acres. Some of their Utica acreage is operated by Chesapeake Energy. So far they have 9 wells drilled or drilling in the Utica Shale and 7 additional wells permitted and numerous other Utica wells in the planning stage.
As the Utica Shale play evolves rest assured we will be writing more on the subject in the near future.