We were among the very first to write about the vast investment potential of the Utica Shale. Please refer to our August 1, 2011 and September 8, 2011 Seeking Alpha articles. (add links)We have also profiled in detail four of the leading Utica Shale players [see our articles on Chesapeake Energy (NYSE:CHK), EV Energy Partners (NASDAQ:EVEP), Gulfport (NASDAQ:GPOR) and Rex Energy (NASDAQ:REXX)].
At the time of our first article, it seemed like (other than Aubrey McClendon of Chesapeake) nobody other than us was talking about the vast potential of the Utica. During the past four months the Utica has been the subject of frenzied activity – billions of dollars of lease acquisitions, takeovers and joint ventures. As a result the Utica Shale has gone “mainstream” and is now the subject of front page coverage by the mass media outlets of all type. Likewise, the number of Seeking Alpha articles has exploded.
We have always found listening to quarterly conference calls to be a valuable tool and thought it might be beneficial to share our notes relating to the Utica Shale from listening to the recent calls of Gulfport Energy, Rex Energy, Petroleum Development Corporation and Chesapeake Energy Corporation. To that end ...
Gulfport Energy Corp. (GPOR) 11-2-2011 conference call
Gulfport has 125,000 gross (62,500 net) acres under lease in the Utica Shale. They are focused within the wet gas/retrograde condensate and mature oil windows of the Utica/Point Pleasant Formation. To quote management “not all Utica acreage is created equal” and “we are in the sweet spot of the Point Pleasant.” GPOR continues to pursue acreage acquisition possibilities. GPOR engaged an outside engineering firm to study their acreage. The results show that the Point Pleasant thickness appears to be essentially constant and thick across all of the GPOR acreage. The study also showed that the Point Pleasant is similar to the Eagle Ford Shale. Water saturation is only 5%, porosity is a little tighter and the permeability is better than the Eagle Ford.
Gulfport will start drilling their acreage in early January. The plan is to drill 20 gross (10 net) operated wells next year. They estimate a cost of $6.5 – 7 million per well with total capex in the Utica next year of $72-76 million. They intend to add a second rig as early as April. Initial thought is they will target a vertical depth of 7,500 – 9,000 feet with 5,000 – 7,000 foot laterals. There will be one frac stage for each 250 feet of lateral. Management says permitting in Ohio is “the wild, wild east” and that a permit can be processed in a couple of days.
They have been deluged with inquiries concerning joint ventures, sales and other monetization proposals from industry players, institutions and private equity firms. Therefore they have engaged a financial advisor to advise them in line with their fiduciary duties and responsibilities to shareholders
Rex Energy Corporation (REXX) 11-2-2011 conference call
To date Rex has 85,300 gross/58,700 net acres in the Utica Shale. As announced earlier, Rex has completed their first horizontal Utica Shale test well – the Cheeseman#1H which flowed at a stabilized 24 hour test rate of 9.2 million cubic feet of dry gas per day. It is currently shut-in and is expected to be placed in service in January of next year. Cheeseman had a lateral length of 3,550 feet and was completed with a 12 stage frac. They see the results as very positive and will drill and complete additional Utica Shale wells in Butler County during 2012.
Regarding the highly regarded Warrior Prospect in the Ohio Utica they stated that Chesapeake recently disclosed well results for 4 wells in their Utica Shale program – 3 of which were in close proximity to the Carroll County, Ohio Warrior Prospect. Rex feels certain that the Warrior Prospect will be at “ground zero” for the liquids rich condensate window of the play. Warrior is 11,000 net acres that they have closed on and they are targeting another 4,000 net acres (likely contiguous with Warrior to allow increased laterals) to bring the total to 15,000 net acres by year end 2011. This should result in 80-100 net drilling locations. Rex will take delivery of their drilling rig in Q2 2012. Early indications from Chesapeake are that the production should have a 60-40 breakdown (60% gas and 40% liquids). Rex may consider a Utica JV but wants to wait and see some additional data points and also wants to wait to see how much acreage they end up with.
Rex will release their capital budget in December and at that time will provide guidance as to the number of Utica wells that they will drill in 2012 and they will give some initial Utica production guidance.
Petroleum Development Corporation (PETD) 11-3-2011 conference call
Petroleum Development a/k/a PDC closed on 30,000 net southeastern Ohio Utica acres in August and is now up to 40,000 net acres for a total consideration of $70,000,000.00 (or $1,750 per acre). They are hoping to take their position up to 80-100,000 net acres next year. All of their acreage is within the anticipated wet gas / oil windows of the play
Their revolving credit facility has been increased from $350 million to $400 million and they plan on divesting their Permian and NECO assets which they hope will net anticipated proceeds of $350-400 million. The asset sales will be used to pay down debt and fund capital expenditures. The company will focus on the Rockies, the Marcellus and the Utica going forward.
The majority of their Utica acreage is held by production (NASDAQ:HBP). They continue to pursue additional Utica acreage and will continue to target HBP acreage since the basin is so new.
PDC has one rig operating currently in the Utica and have spudded their first well which is now drilling. The current well is vertical and was spudded on November 1st and should reach total depth by the end of this month. They have at least two horizontal wells scheduled for next year and an option for two vertical wells. Their acreage is ideally situated in Noble, Monroe, Washington, Morgan, Belmont and Guernsey counties in southeastern Ohio.
Of particular note is word that they have engaged a third party to review and arrange a joint venture for their Utica acreage. The Utica JV is being worked on now – the intention is for PDC to keep a 50-70 % interest. We would expect to see the JV brought to a conclusion by year end.
Chesapeake Energy Corporation (CHK) 11-4-2011 conference call
Concurrently with earnings, Chesapeake announced two transactions to monetize some of their Utica Shale position. We would note that their position is up to 1.5 million acres now.
Their first transaction is a letter of intent with an undisclosed international major energy company for a joint venture in which the new partner would acquire an undivided 25% interest in 650,000 net acres of leasehold in the wet gas area of the Utica Shale play. Of that acreage 570,000 net acres are owned by CHK and 80,000 net acres are owned by the EnerVest interests (EV Energy Partners). The joint venture area covers all or portions of 10 unnamed counties in eastern Ohio. The consideration will be $15,000.00 per acre or $2.14 billion net to CHK with $640 million paid to CHK at closing in cash and the balance to be paid in the form of a drilling and completion cost carry which CHK expects to fully realize prior to year end 2014.
The second transaction is a financial transaction with EIG Global Energy Partners whereby CHK has sold to EIG $500 million of perpetual callable preferred shares in a newly formed subsidiary of CHK. The new subsidiary holds 700,000 net leasehold acres within an area of mutual interest in 13 counties primarily in eastern Ohio. CHK expects to sell another $750 million of additional preferred shares in the subsidiary within the next 30 days. The preferred will receive a 7% dividend and a 3% overriding royalty interest in the first 1,500 net wells drilled. Importantly, CHK has retained substantial upside in the deal by having the right to call the stock back in. As part of the EIG deal CHK has committed to drill a minimum of 50 net wells per year through 2016 in the EIG area of mutual interest.
We note that the JV deal with the unnamed international major is just a letter of intent at this time but that CHK has a 100% track record in the past of converting LOI’s to closed deals. They indicated that the deal should be completed this year at which time the name of their partner will be released.
CHK did not release any additional well results saying that after they released the first batch that lease costs doubled within weeks. They continue to add additional acreage at the rate of approximately 1,000 net acres per day. CHK expects to be finished leasing acreage for the most part by the end of this year. They did say that they now have 19 horizontal wells completed and that 7 are producing. Over 75% of their drilling will be inside the two JV areas of mutual interest.
Importantly, on the oil phase of the Utica, Chesapeake is not considering a joint venture until they have drilled enough wells there to quantify value.
Clearly, these are exciting times in the Utica as the various players stake out their positions and start to release initial results. We continue to hold our stakes (quite profitably we might add) in EV Energy Partners, who will be reporting later this week, and in Gulfport Energy.