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Utica Shale: Wading Through the Hype

It’s hard to get a handle on the Utica shale, and whether it’s an amazing success or a horrible disappointment—this is a matter of perspective. But give us a chance here to expand your perspective for you: The Utica shale is much bigger than you think. All the talk of Utica is centered on the state of Ohio, but this is only a part of the Utica Shale. The rest of it—and it’s massive—lies underneath the Marcellus in Pennsylvania, West Virginia, New York and Maryland. Exploration has so far been limited to Ohio, but this is only scratching the surface. But what this means is that while the lesser known portion of the Utica that lies under Marcellus will have to wait until Marcellus is all fracked out and it’s time to go even deeper.

Utica Shale

For now, we’ve only got Ohio to go on, and the jury is still out, with varying interpretations of the 2012 production figures recently released for Utica. While Ohio authorities called the figures “compelling”, some investors weren’t so sure, bemoaning what they saw as slower-than-expected exploration results and underperformance. What everyone does agree on is that infrastructure will be a problem.

So let’s look at the figures, and you can decide for yourself. This is the result that has sparked so much controversy:  87 Utica wells produced more than 600,000 barrels of oil and 12.8 billion cubic feet of natural gas in 2012. There is a lot left open to interpretation here. Some of the more mathematically inclined will notice this detail from the report: less than 1% of the state’s producing wells accounted for 12% of the state’s oil production and 16% of the state’s gas production—this is Utica.

But there are some other tricks to these figures as well. These 87 wells were producing for less than a year because infrastructure is lacking and producers aren’t ready to open the floodgates without pipelines and processing facilities up and running.

On the other end of this perspective spectrum we also note that the state’s figures fail to separate production into dry gas and wet gas, the latter being the more valuable; nor did they mention that the crude oil in question is worth about 85% of standard crude. 

State officials are still optimistic that that we’ll see over 360 wells producing by the end of this year, and that we will see 1,000 two years from now. It’s basing its optimism on the 2012 pace, but investors aren’t sold yet, and they will determine the real pace.

While there is a ton of potential here, it’s still early days and things aren’t moving fast enough for some of the key players, like Devon Energy and perhaps Chesapeake Energy. While Chesapeake is looking to downsize a bit in Utica, Devon has already given up on the play. But a third player we are eyeing, Gulfport, is doing the reverse. Gulfport probably has the sweetest spot in the Utica and it has actually been expanding its acreage. (It also has a great balance sheet and a nice focus on liquids).

Chesapeake Energy (CHK) took the lead in Utica drilling and production for 2012, producing 372,212 barrels of oil and 10.1 million mcf of natural gas from 53 wells. For oil, Anadarko (APC) E&P Onshore was second, producing 118,726 barrels in Utica, while Hess Ohio Resources was the second biggest natural gas producer, with 922,979 mcf.

Chesapeake is projecting estimated ultimate recovery (EUR) of 5 billion cubic feet to 10 billion cubic feet per well, and is operating 14 rigs in the Utica right now.

Gulfport Energy (GPOR) focuses production on oil and natural gas liquids, which together accounted for 93% of the company’s total production last year. 

The bottom line is that it’s too early to get good picture of production potential because the infrastructure is not in place. In a year and a half we will have a better idea of how this is shaping up—that’s when we’ll see the necessary pipelines and processing facilities online.

What is clear is this: the Ohio Utica is not Eagle Ford—a comparison some were quick to make at the onset. For now, less valuable gas is trumping oil production here and the results have been disappointing, but only because of the misjudged hype off the starting blocks.

Further down the road, this will be a solid play.

Chesapeake is certainly playing the long game here—and its patience will pay off once planned infrastructure is up and running. Of the company’s 250 wells in the Utica, 66 are producing and 87 are just waiting for pipelines to be completed later this year so they can turn on the taps. We’re also looking at significantly declining well costs (up to 30%), which will go some way to ease expenditures for nearly 100 new Utica wells Chesapeake is working on.

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