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.
On August 1, we became one of the first to post on the Utica Shale -- shortly after Chesapeake Energy Corporation (CHK) broke the Utica Shale story by saying:
The Utica Shale is a huge rock unit with a footprint that basically overlaps the Marcellus Shale. The Utica is much deeper than the Marcellus, ranging from 7,000 feet deeper in the eastern portion to around 2,000 feet deeper in the Eastern Ohio portion. The Utica has a much greater overall geographical footprint than the Marcellus as it extends into Ontario and Quebec at its northern boundary. The Utica play is characterized by a dry gas window in the east, a wet gas window in western Pennsylvania-eastern Ohio and an oil window in eastern Ohio. Thus, it has become clear that the portion of the Utica Shale that has everyone so excited is the wet gas/condensate/oil portion located in eastern and western Ohio.
It is our belief that the Utica Shale will prove to be a transformative event not just for Chesapeake and the Ohio, but for the country as a whole.
Chesapeake Energy’s stock price has actually declined since CHK's Utica Shale discovery announced on July 28. If we are to believe CEO Aubrey McClendon -- and we do -- the value of CHK's Utica Shale holdings might equal the current market cap of the entire company. McClendon thinks the Utica Shale could mean 25 billion BOE overall. Chesapeake Energy thinks the Utica Shale will be economically superior to the Eagle Ford play. Chesapeake has not made any formal Utica Shale announcements this month. However, EV Energy Partners (EVEP) issued a press release August 9 detailing a long term joint venture wherein Chesapeake will operate about 40% of Enervest’s 780,000 net Utica Shale acreage.
It is becoming clear that Chesapeake will be the dominant player in the Utica Shale. We would look to hear an announcement from Chesapeake Energy concerning monetization of part of Chesapeake Energy's Utica Shale interest within the next 90 days.
CONSOL Energy (CNX) is a $9.6 billion market cap diversified energy corporation that controls what is likely the largest net Ohio Utica Shale holding (200,000 net acres) after Chesapeake. CNX generated much excitement on August 18 when CNX announced that CNX had sold half of CNX's Marcellus Shale holdings to Noble Energy (NBL) in a transaction valued at $3.4 billion – not a bad deal considering that it was only April 30, 2010 when CNX purchased the Dominion Resources Appalachian E&P business for $3.475 billion. What we like best about the deal is that the deal excluded all of CNX’s acreage in the Ohio Utica Shale as well as some southern West Virginia acreage. This deal is a positive as it will allow for the accelerated development of the Marcellus assets and more importantly free up a lot of cash for the accelerated development of the Utica Shale acreage.
CONSOL Energy has also announced an agreement with Hess Corporation (HES) for the joint (50-50) development of CONSOL’s Utica acreage for an aggregate consideration of $593 million. This represents $6,000 per net acre. As part of the deal, Hess will pay 50% of CONSOL’s working interest obligations relating to drilling and completion costs up to $534 million as the acreage is developed. Thus, CONSOL Energy will be able to explore and delineate CONSOL's Utica acreage for 25 cents on the dollar while retaining a 50% interest. The market responded positively; however, we feel the deal substantially undervalues the company’s Ohio Utica acreage.
EV Energy Partners is an upstream master limited partnership formed by EnerVest in 2006. The various EnerVest partnerships, including EVEP are the largest conventional oil and gas producer in Ohio. As a result of EVEP's conventional Ohio production and related leases, EVEP has a total of approximately 159,000 net working interest acres in Ohio along with the equivalent of a 7.5% overriding royalty interest on approximately 240,000 net acres. When as part of Chesapeake’s original announcement Chesapeake stated that Chesapeake had examined 2,000 well logs, we suspected Chesapeake must have been cooperating with EVEP. With EVEP’s August 9 press release, we can safely assume the veracity of our suspicion. In the press release, EVEP announced that EVEP recently finalized an agreement with Chesapeake on a long term joint venture to develop the emerging Utica Shale of eastern Ohio. Chesapeake will operate about 40% of EnerVest’s 780,000 net acres. EVEP retains EVEP's 7.5% override on 80,000 net acres and has approximately 22,000 net working acres in the joint venture. Chesapeake has five rigs drilling in the Utica at present. Separate from the Chesapeake joint venture, EVEP has 137,000 net acres and the equivalent of a 7.5% overriding royalty interest in approximately 160,000 net acres. Because of the proximity to the Chesapeake-operated acreage, it is anticipated that there will be meaningful cooperation with the CHK joint venture in both contracting oilfield services and midstream operations. On the non-CHK side, it currently is permitting 10 wells and will drill two or three Utica laterals later this year/early next year. In the interim, we should see results of some of the CHK-operated wells within the next 30-60 days.
Gulfport Energy (GPOR) is a well regarded independent E&P company based in Oklahoma City, Oklahoma with a market cap of $1.3 billion. Gulfport has closed on 30,000 net acres in the heart of the oil/condensate window of the Utica Shale in eastern Ohio. Gulfport has commitments in place that will bring Gulfport's total Utica Shale acreage to 57,000 net acres and ongoing discussions that could take Gulfport up to 65,000 net acres. Gulfport management is very excited about Gulfport's position. Gulfport plans on aggressively drilling next year and currently has identified multiple drilling locations and commenced the permitting process. Gulfport looks to drill at least 20 wells in 2012 with the first to spud early next year. Gulfport and EV Energy Partners are two of our favorite Utica Shale plays.
Rex Energy (REXX) is a well run independent based in State College, PA, not far from the liquids rich portion of the Utica Shale. Rex has a market cap of $550 million.
This month the company announced that REXX is raising full year production guidance and that REXX had acquired the rights to lease 11,000 net acres in Carroll County, Ohio, in the heart of the oil window of the Utica Shale. Being based in Pennsylvania, it is only natural that Rex is a player in the Marcellus Shale, where Rex has 63,100 net acres. All told, according to the company, Rex has 83,500 gross acres and 57,900 net acres in the Utica Shale, including the 11,000 net in Ohio. Rex is currently drilling Rex's first Utica Shale well in Butler County, PA and hopes to fracture stimulate it in the third quarter. The 11,000 net acres is essentially at “ground zero” in relationship to the Chesapeake Energy wells in Carroll County.
Thus, Rex will have the benefit of the Chesapeake wells which may essentially de-risk the Rex acreage. With the results of Rex's first Utica well expected in the fourth quarter, the anticipated halo effect of the Chesapeake Carroll County wells and Rex's substantial Utica Shale acreage in relationship to Rex's market capitalization, we expect Rex to be one of the more Utica Shale leveraged E&P companies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.