Chesapeake Out-Drills All Comers In Utica But Misses Sweet Spot

The Utica Shale’s core appears to be shrinking and moving east as Antero Resources (NYSE: AR) sits atop the leaderboard with average wells exceeding 1,000 barrels of oil equivalent per day (boe/d).

On April 25, Ohio's Department of Natural Resources released its second installment of quarterly production rates for Utica wells, which covers all wells flowing in the fourth quarter of 2013.

The report lists 397 wells, with 352 reporting production results. Forty-five wells reported no production while awaiting pipeline infrastructure. The producing wells pumped 1,439,308 barrels of oil and 43,124,803 thousand cubic feet (Mcf) of natural gas.

On average, wells produced 4,089 barrels of oil and 122,514 Mcf of gas, according to Ohio. Compared with revised 2013 third-quarter data oil production increased by 103,982 barrels, or 8%, the state said.

“The sweet spot of the Utica is increasingly well-defined and localized,” said Bob Brackett, senior analyst for Bernstein Research, in an April 25 report.

The most productive areas appear to be in a few hundred thousand acres or so around Belmont and Monroe counties.

While Chesapeake Energy Corp. (NYSE: CHK) is the Utica’s leader in terms of drilling activity, the company lags significantly by results and wells to Antero, Hess Corp. (NYSE: HES) and Gulfport Energy Corp. (NASDAQ: GPOR), Brackett said.

Chesapeake does not have a well among the top 20 in the play despite having five times the wells producing versus its nearest competitor.

Anadarko Petroleum Corp. (NYSE: APC) and Devon Energy Corp. (NYSE: DVN) results in Ohio have been disappointing, “but we note their producing well counts are less than a dozen as opposed to CHK’s more than 200,” Brackett said.

“We believe this gap in performance is a function of where in the play operators are drilling as opposed to completion technology,” he said.

While Utica production is a relatively small fraction of Chesapeake’s total production, the Utica play contributes to the company’s market value.

“As such, these less impressive results are a net negative on the stock,” Brackett said.

Utica production is difficult to interpret because of the lack of infrastructure and the limited production history, said Gabriele Sorbara, an analyst with Topeka Capital Markets.

“However, based on the data the most prolific portions of the Utica shale are proving to be in the gassier areas,” he said. “While the Ohio dry gas window has proven to be highly prolific, we believe the West Virginia dry gas area could potentially be better with the core in Marshall, Wetzel and Tyler counties. This area is geologically deeper and higher pressured, which should translate into higher recoveries.”

Fourth Quarter 2013 Utica Shale Production (Per Selected Operator)

Source: Ohio Department of Natural Resources; Topeka Capital Markets3Q Production/Well

By volume, the Utica produced 0.5 billion cubic feet per day (Bcf/d), up 28% quarter over quarter.

Brackett said well level declines for the play vary widely but average 25%, a high decline expected for shale gas wells.

Range Resources (NYSE: RRC) has a Utica footprint but no wells drilled in the Ohio database.

“As the Utica sweet spot ‘moves east,’ it increases the odds that RRC has exposure to the play,” Brackett said. “RRC's position in west Pennsylvania is only one to two counties east of the sweet spot. Time will tell if the area is prospective and if well costs are economic.”