Is the Utica Shale For Real?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Gulfport Energy (NASDAQ: GPOR) seems to think so. The small oil and liquids focused E&P company has devoted about 33% of their 2012 capital budget toward the play, which doesn’t include another 10% of additional capital to be spent on infrastructure and vertical integration projects. They and their peers are working to recover the potential 1.3 to 5.5 billion barrels of oil and 3.8 to 15.7 trillion cubic feet of natural gas that the Ohio Department of Natural Resources estimates is locked in the state’s Utica Shale.
For some context, the hotly debated ANWR oil field has a projected range between 5.7 and 16 billion barrels of oil while the total undiscovered, recoverable oil in the US is estimated at 120 billion barrels. Meaning the Utica in Ohio could at least hold 1% of our recoverable reserves and at best be something really special. Even though it’ll never be enough to shake our addition to foreign oil as last month the US imported 337 million barrels of oil it is another step in the right direction.
Gulfport is not the only one that is turning their focus to this emerging shale play. Another smaller driller, Rex Energy (NASDAQ: REXX), began their drilling operations in the second quarter in the Warrior North Prospect. They see over 120 drilling locations in their current net acreage, five of which will be drilled this year. Rex has a large Marcellus position in their home state of Pennsylvania but it would appear that they’ve made a wise move to take some of their exploration dollars across the border.
It’s not just the smaller drillers that are turning toward the Utica; the nation’s number two natural gas driller Chesapeake Energy (NYSE: CHK) is largest leaseholder in the play with more than a million net acres. They’ve already drilled 87 wells and are currently operating 11 rigs and plan to exit the year with 16 drilling rigs.
What these producers like is the play is similar in geological structure to the Eagle Ford Shale in south Texas. The play, which is nearly a mile below the Marcellus Shale, however, is expensive to drill. Gulfport for example is spending around $75 million to drill just 20 wells this year or $3.75 million per well. Compare this to their Permian Basin program at just a million dollar per well.
The results though might make it worth the investment. In Gulfport’s first Utica well that’s been brought online they saw an average peak rate of 4,650 barrels of oil equivalent per day. With just shy of a $100 price point last quarter for barrels of oil equivalent, that math works out to just under a half a million dollars per day in value. That well might be an aberration as Chesapeake is only seeing about 1,000 boe/d for their Utica wells. In the Eagle Ford Chesapeake is seeing most of their wells averaging 500 boe/d though more than 30% of their wells are yielding 1,000 boe/d.
The Utica is now beginning to draw the attention of some multi-nationals. Earlier this year Chesapeake sold a 25% stake in 600,000 of their Utica acres to French energy giant Total for more than $2 billion. Meanwhile, US based Anadarko (NYSE: APC) has built a quarter million net acreage position in the play and are currently drilling their first two test wells. They plan to ramp their rig count with rigs redeployed from the Marcellus.
In order to handle all the new production coming out of the Utica producers are looking to projects under development by MarkWest (NYSE: MWE). They are constructing two processing complexes in Ohio as well as a fractionation, storage and marketing complex. They’ve already signed an agreement with Gulfport to provide gathering, processing, fractionation and marketing for their liquids rich Utica production and have a letter agreement with Rex for similar services. Markwest’s joint venture partner The Energy & Minerals Group in the Utica has already committed $500 million toward first capital expenditures.
I started by asking if the Utica Shale was for real, while we are still early in its development; the early results are very encouraging. So much so that Gulfport calls the Utica on of the most promising up-and-coming oil-levered plays in North America. That’s coming from a company’s whose sole focus is on up-and-coming North American oil plays. I’d say it’s for real and if I were to pick which first mover will come out to be the big winner I’d go for the underdog.
latimerburned has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.