Utica Shale Players 2nd Quarter Conference Calls Update

by: StockMarketPundits

For those who follow us you know that we were among the very first to write about the vast potential of the Utica Shale (starting with our August 1, 2011 article - accessible here). We have subsequently updated our Utica outlook and profiled four different leading Utica Shale players.

This is our fourth compilation conference call article. As we have previously stated we think quarterly conference calls are invaluable sources of information and often give "color" that can not be obtained elsewhere. Therefore, we are once again sharing our notes relating to the Utica Shale from the recently concluded second quarter conference calls of Chesapeake Energy Corporation (NYSE:CHK), EV Energy Partners LP (NASDAQ:EVEP-OLD), Gulfport Energy Corporation (NASDAQ:GPOR), PDC Energy Inc. (NASDAQ:PDCE) and Rex Energy Corporation (NASDAQ:REXX). To that end…

Chesapeake Energy Corporation

The entire Chesapeake conference call can be accessed here. Chesapeake reminded us that it is the leading Utica leasehold owner, driller and producer with 12 operated rigs currently working to evaluate their one million plus net acreage position. Chesapeake continues to delineate the wet gas window as well as the highly productive dry gas window towards the east. The oil window has been tested by Chesapeake on both an operated and non-operated basis as well as by competitors that are beginning to report results. Well completions are progressing at a quickening pace in the Utica as midstream infrastructure comes into service. Chesapeake looks for a strong contribution from the Utica in 2013 and beyond.

In the Q and A session Chesapeake stated that they have been focusing their drilling close to existing pipelines to minimize the lag between completion and sales and production.

Chesapeake was asked if they still felt that the Utica was going to be at least as good as the Eagle Ford and they responded by saying that they would not make that statement comparing the oil plays as it is way too early on the Utica side and that Chesapeake has not focused much of their efforts in that area. Chesapeake did say that they felt in the end the Utica wet gas will be competitive with the Eagle Ford wet gas and that the Utica dry gas side is just as good as the Marcellus.

Chesapeake is averaging about 6,500 to 7,000 total vertical depth and 5,000 foot laterals on the 28 wells that they have drilled.

Chesapeake said they will do at least one joint venture in the dry gas part of the Utica play but will wait until 2013 when they expect better gas prices. On the oil side it remains to be seen if the results will allow them to do a joint venture and they also have a few other joint venture ideas for the Utica. Chesapeake characterized the joint venture market as strong and said it was supplemented by the interest of private equity players during the past year or so.

Finally, Chesapeake was asked if they had one rig where would they place it, in the Utica or the Mississippi Lime? They answered by saying Carroll and Columbiana counties are tough to beat in the Utica and that Alfalfa and Woods counties are tough to beat in the Mississippi Lime so they were not going to try to declare a winner between those two.

EV Energy Partners LP

The entire EV Energy Partners conference call can be accessed here. EV Energy stated that their sale process for their Utica Shale assets has commenced and that the data room has been opened. They are marketing the assets in two separate packages. Package number one consists of operated lease and package number two consists entirely of non-operated leases. EV Energy will retain all rights to the deeper Knox formation the shallow Clinton formation their 2% overriding royalty interests and their interest in all midstream Utica assets. Additionally, certain noncore Ohio Utica acreage and Northwest Pennsylvania Utica acreage will be excluded from the sale process. EV Energy's total Utica assets currently are 150,000 net working interest acres in the Ohio Utica and a 2% overriding royalty interest on 800,000 gross acres in the Utica. EV Energy confirmed once again that they will consider any and all offer for the assets, i.e., cash, stock, like kind assets etc. They are still hopeful of closing a deal this year. Jefferies will be representing EV Energy in the sales process.

EV Energy will invest $20-$25 million in capex in Utica midstream assets during 2012 and $50-$75 million during 2013 for Utica midstream assets.

The joint venture with Chesapeake is progressing well. The joint venture currently has 5 wells producing 12 flowing, testing or shut-in, 15 dissipating 17 completed and 3 currently drilling. Utica horizontal wells are now taking only 15 days to go from spud to total depth. The average well is now around $6 million per well. The wet gas window is significantly derisked. Some Carroll County offset wells are now 2 to 3 times better than last year's original discoveries. EV Energy expects that well completion techniques will continue to improve.

The biggest news was their initial results from the oil window of the Utica - the Frank 2H well in Stark County was brought on line and flowed at an initial unassisted rate of 515 barrels of energy equivalent per day. About forty per cent of the production was light crude oil and forty percent natural gas liquids. EV Energy expects the Frank 2H production to increase once standard artificial lift (pump) equipment is installed and the well is tied in to sales. EV Energy also has the Habrun well in the oil window in Stark County and the Cairns well in the wet gas window in Carroll County in the dissipation period.

In the question and answer period EV Energy stated that even the economics of a 200 barrel a day oil well looks good.

The Frank 2H will be put on pump within 60 days. The company did not want to speculate how much the production of the Frank well would increase because there are two many characteristics of the reservoir that are unknown at this time. The cost of the Frank well was around $8 million and will have a 14 mile pipeline to it and has a four acre pad (which might end up being a six well pad). EV Energy noted that the cost of the pad construction can run $700,000 to $1,000,000 to build.

Gulfport Energy Corporation

Gulfport's entire August 8th conference call can be accessed here. Gulfport had the most exciting and informative conference call of the Utica companies that we follow. First, Gulfport announced the results of the Wagner1-28H well which were quite staggering in nature as the well which was Gulfport's first horizontal Utica well came in at 17.1 million cubic feet of natural gas per day and 432 barrels of condensate per day. The Wagner well represents the best well in the Utica to date and is the best well that Gulfport has ever drilled. Secondly, Gulfport released preliminary results for their next three Utica wells - all three of which also appear to be "homeruns". The three wells are the Boy Scout #1-33H, the Groh #1-12H and the Shugert #1-1H. The Boy Scout #1-33H was dilled to a total depth of 7,704 feet with a 7,974 foot lateral and 22 frac stages. During a seven hour test from just one of the frac stages the well produced at a rate of 470,000 cubic feet per day of gas and produced 40 barrels of condensate in just one and a half hours. The Groh#1-12H was drilled to a depth of 7,289 feet with a 5,414 foot lateral and 15 frac stages. It tested 384,000 cubic feet per day of gas and 192 barrels of condensate per day from just one frac stage. The Shugert#1-1H was drilled to a total depth of 8,661 feet with a 5,758 foot lateral and 16 frac stages. The Shugert#1-1H tested 2.9 million cubic feet of gas per day with 100 barrels of natural gas liquids per 1 million cubic feet of gas from just one frac stage. Management also advised that the three partial well results were run without tubing in the wells which reduces the results. All three of these wells are scheduled to be in production and connected to the gas sales line by the end of September.

Switching to the question and answer portion of the call Gulfport stated that they will not have a lot of water disposal problems in the Utica. Gulfport will continue to delineate their holdings by drilling throughout their holdings but will focus on the western portion where they are seeing more condensate. Costwise their rule of thumb for the Utica is $1,500 per foot for a 5,000 foot lateral and $1,200 per foot for an 8,000 foot lateral. Next year they would like to take that down to $1,200 per foot for a 5,000 foot lateral and $1,000 per foot for an 8,000 foot lateral. Also, on the service cost side the company noted that this is a good time to be in the Utica because of the slowdown in the Marcellus. Gulfport will be using frac sand from their own sand mine by the end of this year and is seeing service costs coming down a little bit.

Regarding permitting, Gulfport has seven permits in hand and is working fifty locations and is identifying another one hundred fifty locations. The permit process in Ohio continues to be efficient and they have just hired someone to do all Ohio permitting. Gulfport is currently running two rigs and may add a third rig as early as the 4th quarter of this year. The twenty Utica wells that they are aiming for this year will be paid for out of cash flow. In 2013 Gulfport plans to drill fifty Utica wells.

In conclusion, the Utica continues to be "derisked". The current results seem to indicate that both the dry gas window and the wet gas window are meeting and/or exceeding all expectations. With the oil window results just starting to become available any judgments on the oil window will have to wait at least another quarter or two.

The Wagner#1-28H is now hooked into the gas line and selling production of 10,000,000 cubic feet of day. That rate is production constrained and will be reviewed and may be increased in the future. Any increases will be slow so as to protect the reservoir. Gulfport reminded us that they are an anchor tenant on the MarkWest pipeline and therefore have "priority" status.

Finally, Gulfport again said that based on current thinking that their Utica acreage will breakdown as 17% dry gas , 73% wet gas and 10% in the oil window.

PDC Energy, Inc. (PDCE)

Please note that PDC has changed their name from Petroleum Development Corporation and has a new stock symbol. The entire August 2nd PDC conference call can be accessed here. PDC drilled, cored and completed their second vertical Utica test well in eastern Morgan County, Ohio. The well encountered over 100 feet of pay in the Point Pleasant. The well has been frac stimulated and production testing is pending the well "resting period". Additionally, PDC has reached total depth on the first of two horizontal wells in Guernsey County, Ohio. The well has a 4,000 foot lateral with in excess of 100 feet of pay. PDC is presently moving a rig to their second horizontal well location in Guernsey County. PDC continues to progress with their joint venture discussions and expect to conclude discussions this quarter.

PDC stated that they have firmed up a 45,000 net acre position almost entirely within the wet gas and oil window of the Utica play. PDC continues to believe that the Utica will be a world class shale development. PDC expended $102 million on leasehold acquisition and exploration in 2012 almost all of which was in the Utica. The completion date for the first horizontal well is scheduled for early September. PDC is evaluating multiple mid-stream options.

During the Q and A session PDC stated they were very encouraged by what they have seen in the first horizontal well that they drilled in Guernsey County. PDC stated that the results for the flow rates for both the vertical well and the first horizontal well will be available in 60-90 days. PDC stated that after securing their 45,000 net acre Utica position that the next step is to secure a joint venture partner this quarter and then grow their Utica leasehold position to target 80,000 - 100,000 net acres. PDC wants to announce a joint venture agreement this quarter with a closing to follow in the 4th quarter. The cost of their leasehold position is less than $2,000 per acre. PDC's acreage is concentrated in two key areas with largely contiguous blocks so as to allow horizontal drilling. The first key area is Guernsey and Noble counties and the second key area is eastern Morgan county and northern Washington county.

Rex Energy Corporation

The entire Rex Energy August 8th conference call can be accessed here. Rex Energy completed their first Ohio Utica well - the Brace#1H in the Warrior North prospect. The Brace#1H well encountered over 135 feet of Point Pleasant formation and 143 feet of Utica pay zone. The well had a 4,175 foot lateral and 17 frac stages. The well is now shut in for a 60 day rest period to dissipate frac fluid. Actual results will be available in the 3rd quarter. The Brace#1H and G. Graham#1H wells are approximately 1 mile from two Chesapeake reported discoveries in the oil/condensate/liquids rich gas zone. Dominion East Ohio is on schedule to connect the Brace#1H well to sales next month. Rex has over 100 net drilling locations in the Warrior North Prospect. The Warrior North Prospect is now at 18,500 net acres and Rex is actively leasing in the area and expects to reach 20,000 net acres by yearend.

Rex also spud their first well in the Warrior South Prospect during the quarter. The well is called the Guernsey#1H. This is the first of three commitment wells that Rex must drill on the Warrior South Prospect. The second and third wells will be the Noble#1H and the Guernsey#2. All three wells will be completed in the third quarter of this year and one will be fracked in the fourth quarter.

Warrior South is a joint development area with two partners and currently contains 21 net drilling locations based on the present 5,600 gross acres (3,100 net acres). Rexx is actively leasing in the area and expects to secure wet gas transporting capacity for Warrior South development. Warrior South is located in Guernsey, Noble and Belmont Counties.

In the question and answer period Rex stated that they already have take away capacity from Dominion in the Warrior North Prospect and are negotiating with MarkWest (which already has lines running across the Rex property) to secure take away capacity.

Rex acknowledged the great offset operator results from nearby locations and said they felt that the Warrior South Prospect should be on range with the Buell#8H and the Wagner#1-28H wells.

Rex currently is running one rig in the Utica which they have under a two year deal. Rex stated that they have the balance sheet flexibility to bring on a second rig and will be studying that as well results come in.

In conclusion, it was another exciting and informative quarter of developments in the Utica Shale. At this stage, it appears to us that both the "dry gas" window and the "wet gas" window of the Utica Shale will exceed the already high expectations that have been set. Meanwhile, with initial well results just beginning to trickle in we will have to wait at least another quarter before an informed assessment can be made of the "oil window" section of the Utica Shale play.

Disclosure: I am long EVEP-OLD, GPOR.