The Giant Utica Shale: Marcellus On Steroids

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Includes: CHK, REXX
by: David Fessler

By now, most investors are familiar with the Marcellus Shale. Located roughly a mile beneath the surface of West Virginia, Pennsylvania, Ohio and New York, the Marcellus is transforming the natural gas industry.

By some estimates, the Marcellus could provide as much as 25 percent of America’s natural gas when fully developed. But the development of the Marcellus Shale was just the opening act for natural gas production in the Northeastern United States.

Act two is the exploration and development of the Utica Shale. The Utica Shale underlies the Marcellus at depths ranging from 2,000 to 14,000 feet below the surface.

Take a look at the map below. It was compiled by Geology.com, with data from the EIA and USGS. The Marcellus boundary is outlined in yellow, and the Utica source rock is shown in green. It lies beneath eight states, Lake Erie, Lake Ontario and part of Ontario, Canada.

Many geologists believe that if the Utica Shale formation is developed to its full potential, it could become the largest natural gas field in the world.

At this point though, oil and natural gas exploration and production companies have just begun to focus on the development of the play. Initial drilling results from the first few wells have proved to be very encouraging. Let’s take a look at two companies out in front of the scramble to drill the Utica.

Two Early Movers in the Utica
There are gas wells, and then there are gas wells. The first one that Rex Energy Corporation (NASDAQ:REXX) drilled in the Utica Shale was something else.

Rex Energy has 85,300 gross (58,700 net) acres in the Utica Shale. Its first well, the Cheesman #1H, had a lateral length of 3,551 feet and was fracked in 12 stages.

The initial flow rate from the well over a 24-hour test period was 9.2 million cubic feet per day (MMcf/d) of dry gas. The well was subsequently shut-in, and Rex plans to place it in service next January.

Besides the fact that this is an incredible flow rate from a shale gas well, the gas itself was completely dry. This is a significant, since wet gas (containing natural gas liquids, water and other chemicals) requires significantly more processing before it’s ready to sell.

Rex is viewing the test results as very positive and has an active drilling program planned for the Utica for 2012. Rex will disclose the number of wells it plans to drill in the Utica and well costs in December, when it announces its capital spending plans for next year.

Chesapeake Energy Corporation (NYSE:CHK), one of the largest natural gas drillers in the country, is focused on the oil-rich part of the Utica, in eastern Ohio. Chesapeake quietly amassed over 1,250,000 acres in the Utica in the oil-rich area.

Then it announced drill results that were very encouraging. Chesapeake estimates the value of recoverable oil from the oil-rich part of the Utica it has under lease is $15 to $20 billion. The company leases cover about 40 percent of the oil-rich part of the Utica formation.

It recently announced a joint venture with an “undisclosed international major energy company” to monetize the value of this incredible find. Chesapeake is committed to drill a minimum of 50 wells per year between now and 2016. The company plans to add additional rigs in support of the joint venture, and believes it will have no problems meeting the drilling commitments.

The net proceeds upon the successful completion of the joint venture would be about $3.4 billion. Over the last three years, five joint ventures executed by the company have netted roughly $34 billion. Who ever said real estate was in a slump?

As the Utica is drilled and further delineated, either of the above two companies is an excellent way to play the upside of this exciting new shale play.

Disclosure: None