Over the past few months we have covered the Utica extensively and we believe that in the near future investors will finally see the potential of the area which we have been talking about. Two of our previous articles covered the players in the industry, but we think the way to truly profit from the Utica is to invest in those companies with the greatest exposure to the oil and wet gas windows.
Chesapeake (CHK) reports its quarterly results November 3 and the Utica should feature prominately in the Q&A of the conference call. The first topic should be the Granite Wash Trust IPO (as there was a release on the matter Wednesday), but we suspect that the conversation will soon turn to the Utica Shale in Eastern Ohio. Due to world events, and the volatility that has resulted, the company will probably not be announcing the JV for the Utica but should be able to give some guidance on the expected monetization of those assets. We have seen some brokers say that CHK will not be able to realize the previously thought price for the stake it wants to sell, and if that is true then management will probably try to calmly alert investors to this fact.
Regardless of the outcome of CHK’s finalized sales price, we do know one thing and that is that the Utica has real value in it long-term. It is our opinion that the Utica will eventually become the 2nd best unconventional resource (shale) play after the Bakken. The oil and wet gas are key as natural gas faces a glut from all of the new production coming online today, and these will ultimately make these wells economical at today’s natural gas prices. The natural gas should be viewed as a by-product, much like uranium is a by-product for many gold mines or even silver for some gold mines.
Due to their large land holdings, the largest in the play at this time in fact, we believe that Chesapeake will be the most popular play in the area. Although well documented, it must be restated that the company and its CEO, Aubrey McClendon, believe that the Utica alone has the potential to double the company’s market cap. At this point, CHK is the first mover in the area and is quite a few steps ahead of the competition, both in amassing a superb land package and its drilling which has enabled the company to learn far more than anyone else about the underlying geology.
CHK is the most logical investment choice for many investors, but we think there are a few other plays which warrant attention due to their leverage to the play.
One company which is not receiving its due is EV Energy Partners, LP (EVEP) which we believe is the best play in the Utica for investors seeking both yield and massive capital gains. We think the company has one of best land positions in the play. In fact, when Chesapeake wanted to lock up land for its 1.25 million net acre position, it went to EVEP and locked up land that way. EV Energy Partners has over 600,000 net acres in the Utica and according to our data is the second largest position in the play. EVEP also enjoys the fact that much of its land is held by production (HBP), thus it can develop it at its own pace and not pile on debt to fund exploration.
EVEP is not producing from the Utica Shale, but rather older assets which are mature and at much shallower depths than the Utica. As we have stated in previous articles, no matter how you look at this one, it is undervalued. Plug in the cheap prices ($6,000/acre) paid by early movers for land predominately in the dry gas window and you still come up with an undervalued entity based simply on JV potential, not even factoring in exploration success and/or development.
Gulfport Energy (GPOR), which is not just a Utica play, but a company with mature assets (generating cash flow) and other shale and oil sands plays is another favorite which we suspect will rise further due to its Utica leverage. Gulfport has been on a run as of late, up over 50% since it fell below $20/share. GPOR is focusing on oil in the Utica, and the company is looking to expand its acreage above its current holdings and commitments. GPOR is focusing on the wet gas and oil windows for these additions, not the dry gas window. In early 2012 Gulfport will begin drilling its Utica holdings.
Due to Gulfport’s dramatic rise as of late, Utica success will have less of an impact directly on the shares as they previously would have when the shares were in the $20-25/share range. With Gulfport however, Utica success will enable further develop for the company’s entire land package and other plays by helping to internally fund these projects. GPOR is a stock which we have previously purchased and so far enjoyed the Utica exposure; with its 2012 plans, we believe that it will be one of the first companies able to report Utica success to shareholders.
Our third play for big gains as a result of the Utica exposure is Rexx Energy (REXX). Its holdings are not all in the wet gas and oil windows of the Utica, but based on the company’s market cap and the potential of its land position, REXX is more than a decent speculation. The company and its joint venture partners will also be able to benefit from HBP categorization as they are targeting both the Marcellus and Utica Shales in Western Pennsylvania. The company also has the Warrior prospect in Eastern Ohio which it hopes will yield oil and wet gas.
Based on our assumptions of the lowest value of its land holdings and its highest, the company’s shares could appreciate anywhere from 50-100% and this is just based on JV values, not exploration success. REXX appears well positioned for exploration success with good JV partners in Western Pennsylvania. We expect that the company should surpass the $1 billion market cap threshold some time in 2012 based on news flow from the Utica in general, the company’s plans for the area, and investors’ realization of the full potential of the area.
We feel that these companies are the best way to play the Utica and that Chesapeake should provide significant insight in to the Utica during the conference call. We expect their JV deal to be delayed, but ultimately completed for a price within the ballpark of the previously estimated range of prices. Chesapeake, EV Energy Partners, Gulfport and Rex Energy, in our opinion, provide the best exposure to the Utica and should richly reward shareholders as the market revalues these plays as further drilling results come in.