Utica Shale Conference Calls Update (4th Quarter)

by: StockMarketPundits

We were among the very first to write about the vast potential of the Utica Shale. Please refer to our August 1, 2011 (here) and September 8, 2011 (here) Seeking Alpha articles. 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 Energy (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 six 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 types.

As much as we like pontificating and listening to others do the same on subjects of interest to us we have always found listening to quarterly conference calls to be an invaluable tool and thought it might be beneficial to once again share our notes relating to the Utica Shale from listening to the recent 4th-quarter/year-end conference calls of Chesapeake Energy, Gulfport Energy, Rex Energy, Petroleum Development Corporation and EV Energy Partners. To that end…

Chesapeake Energy Corporation

To date Chesapeake has invested $2.2 billion in the Utica Shale play and has sold roughly 20% of its Utica Shale leasehold acreage for a total cash and carry of $2.3 billion i.e., it has recovered 105% of the cost and still has 80% of the acreage left. Note that the average holding period for the leases was only one year - pretty remarkable. Chesapeake is running six rigs in the wet gas window of the play and one each in the oil and dry gas windows. It plans to ramp to 20 rigs by year-end 2012. To date it has drilled 42 wells in the play, with 7 of these on production and the balance awaiting completion and/or pipeline connections. Two recent completions (Burgett and Shaw wells) have peak production of over 700 barrels and 3 million cubic feet per day (mmcf/day). Drilling time from spud to release is down to 16 days (was up to 48 days for the earlier wells). The Total JV deal relates to the acreage in the wet gas window and excludes the oil acreage and the dry gas acreage. This leaves Chesapeake with 400,000 acres in the dry gas window and 400,000 acres in the oil window of the play. Chesapeake feels it will have well costs down to below $6,000,000 with a 5,000 foot lateral. It feels that its wet gas and dry gas Utica acreage is fully de-risked and look forwards to doing the same to their oil window acreage as they add rigs this year.

EV Energy Partners

EV/EnerVest entities have participated with Chesapeake Energy in 27 wells and have 5 producing. EVEP is drilling its first Utica Shale well - the Frank 2H in Stark County in the oil window of the Utica. It plans to commence the monetization process for the EVEP Utica assets in the second quarter.

The EVEP Utica acreage is now right at 150,000 net working acres plus the equivalent of a 7.5% override on 230,000 net acres.

EVEP and EnerVest are participants with Chesapeake and Total in a joint venture across several counties in the wet gas - liquids rich area of the Utica Shale. Overall, the Total deal was $15,000 per acre for a 25% interest in 619,000 acres - 30% cash and 70% carry (which is expected to be used up in three-five years - more likely three or less). EnerVest contributed a total of 77,000 acres into the Chesapeake/Total deal and EVEP 4,000 acres of that total. EVEP is also a participant with a 9% interest in the gathering system and has a 6% interest in processing facilities for this area.

Activity in the Utica continues to mount with over 120 wells permitted - seven are in production and 35 are awaiting completion. EnerVest entities have participated in 27 of these wells.

EnerVest will participate in 25-50 wells in the Chesapeake/Total JV. The actual drilling plans are still being worked out between Chesapeake, Total and EnerVest. EVEP will also participate in a few wells with other operators this year in the oil window of the Utica.

EnerVest participated in the two recent completions - the Burgett and the Shaw in Carroll County, which were referenced to produce at peak rates of over 700 barrels and 3 million cubic feet per day. They are very pleased with the economics so far.

The first EnerVest operated well the Frank 2H was recently spudded. EnerVest plans to drill three-five wells on its operated production this year mostly on the eastern edge of the oil window and other places where the Utica is not being delineated thoroughly. Generally, EVEP will have a 20%-40% interest in these wells

It is currently putting data together to pursue some form of monetization of some or all of the Utica acreage this year. It plans to formally start the process in the second quarter. It will consider joint ventures, swaps and/or outright sales. It hopes to finalize the process later this year. Currently it is allocating 10% of the $140-180 million capital program for this year to the Utica (pre monetization).

Currently it believes that Devon, Anadarko and Chesapeake are drilling in the oil window of the Utica.

EVEP views the $15,000 per acre Total deal as a base price and feels that the wet gas and oil acreage has increased in value since the Chesapeake/Total deal

Gulfport Energy Corporation

The Utica has the potential to make a significant impact on Gulfport within a short period of time. Gulfport invested $118.2 million in the Utica during 2011. It has 125,000 gross acres (62,500 net acres) with five-year terms and five-year options. IT has closed on 85% of the acreage with the balance awaiting title clearances etc. Gulfport has five Utica permits filed representing the first five wells to be drilled - two will be in Harrison County, one in Guernsey County and two in Belmont County. The first well is in Harrison County and the drill rig is in position and the well has been spud. Gulfport will add a second drilling rig as soon as April. Gulfport has over 30 locations in various stages of permitting. It plans on using "super pads" which will allow multiple laterals from one pad. Gulfport says there are 18 horizontal wells currently drilling in the Utica. We can expect an announcement (letter of intent) shortly on Gulfport's selection of the midstream partner in the Utica. The midstream partner is important because maximizing the value of the natural gas and liquids will be critical. The more it learns about the Utica play the more enthusiastic about the play it becomes. We should see the results of 20 gross wells this year in the Utica from Gulfport. The initial well spud is in southern Harrison County to be followed by another in Harrison County, then it will move to Belmont County and then to Guernsey County. As we said it is working on 30 locations. The plan is to drill north to south and east to west to delineate acreage this year. In 2013 the plan is to drill 50 wells and then in 2014 it plans to drill 70 wells just to hold acreage. It does not expect permitting to be a problem in Ohio, as it is still possible to walk a permit through in one week even though the state is swamped with Utica applications. Gulfport expects about $7 million per Utica Shale well depending on the length of the laterals and the depth. Utica production for Gulfport will be back-loaded this year but should start in the 3rd quarter and accelerate in the 4th quarter.

Petroleum Development Corporation

Petroleum Development is instituting a drilling moratorium on their Marcellus acreage (which is mostly held by production) and reallocating capital to Wattenberg and Utica as it seeks to increase its oil exposure. It has acquired rights to 40,000 net acres in the Utica Shale play for $70,000,000 - $1,750 per acre. It has drilled and completed the first Utica well in December 2011 and is continuing to evaluate the results. The 2012 capital budget is $284 million of which $100 million is allocated to leasehold, exploration and acquisition (mostly Utica -pre joint venture). The company would not divulge the actual amount of Utica acreage that it has closed on - it is still on target for 40,000 acres - the company hopes to wrap it up within the next quarter. The delay was blamed on Ohio title procedures/issues taking longer than expected. Petroleum Development is identifying available blocks of Utica acreage to target once it has done the expected Utica Shale joint venture. Petroleum Development has identified drilling locations but has no permits in hand. At its Analyst Day in a couple of weeks it will discuss locations in more detail. After it does the anticipated Utica Shale joint venture this year it still hopes to up its Utica Shale acreage to 80,000 - 100,000 gross acres (which could actually leave it with more Utica exposure than it currently has).

Rex Energy Corporation

During 2011 Rex successfully drilled its first Utica Shale well in Butler County, Pennsylvania (the Cheeseman #1H). It will spud its first well in Carroll County, Ohio in April - it should be perspective for liquids. During 2012 it has reduced the Butler County Utica wells (dry gas) from the expected three to one this year. On the prime 15,000 acre Warrior prospect in Carroll County, it has now closed on 13,700 acres with the remainder expected to close this quarter. The Warrior acreage is approximately one mile away from two Chesapeake Energy discoveries. There are also five other Chesapeake Energy completions adjacent to the Rex acreage. The current size of the Warrior prospect allows the opportunity for 100 net drilling locations. It will drill two wells on the Warrior prospect this quarter. The "Brace" and "G.Graham" will be the first two Rex Carroll County wells. Results should be available during the second-quarter conference call in August. It continues to believe that the Rex Carroll County acreage is "ground zero" to the Chesapeake results. We would note that the nearby Chesapeake wells that Rex management mentioned appear to be the CHK Mangun 22-15-5 with 1,500 BOE/day and the CHK Neider 10-14-5 with 1,600 BOE/day.

Disclosure: I am long GPOR, EVEP.