Despite Low Production, Utica Investors Continue To Spend Large

The oil and gas industry can be a gambler’s business, and the bets placed on the Utica Shale continue to be big and brash.

In the shadow of the Marcellus, the Utica has been the industry equivalent of an overnight sensation. It is among the fastest growing plays in the U.S.

As U.S. shale plays go, the Utica isn’t putting up the awe-inspiring production numbers. Operators generate roughly 4% of U.S. gas volumes, mainly from a handful of counties in Ohio. But that hasn’t stopped investors from raining down money on the upstream and midstream companies in the largely gas play.

In 2014, more than $10 billion worth of deals were connected to the Utica. While deals have been hit and miss in 2015 since oil prices were sucked under, as of April 29 two of the largest deals of the year were in the Utica.

Mid-cap U.S. oil and gas E&Ps are viewed negatively going into May—except if they work in the Utica, according to an April 27 report by Jeffrey W. Robertson, analyst, Barclays Capital.

In good standing are companies such as Antero Resources Corp. (NYSE: AR) because of its position in the Marcellus and Utica and Eclipse Resources Corp. (NYSE: ECR), which has a sizable acreage position within the core of the Utica and liquids-rich Marcellus in southeastern Ohio.

Those positions “could support very strong production and reserve growth over the next several years,” Robertson said.

Another favored company: Gulfport Energy Corp. (NASDAQ: GPOR), which on April 15 said it was adding 24,000 net nonproducing acres to its core dry gas window in Belmont and Jefferson counties, Ohio. The purchase boosts the company’s Utica holdings to 208,000 net acres.

The transaction valuation for the land is $12,700 per acre, said David Kistler, managing director, Simmons & Co. International.

The shale continues to attract investment in the downturn. The EIC Monitor from the U.K.-based Energy Industries Council reported that low oil prices slowed levels of contracting by 30% across global upstream, midstream and downstream sectors in the first quarter of 2015 compared to the fourth quarter of 2014.

However, it reported four midstream front-end engineering and design (FEED) contracts were awarded in the first quarter of 2015. Two are located in Oman and two in the U.S. Of the four, AECOM (NYSE: AECOM) is conducting the FEED for Energy Transfer Partners LP’s (NYSE: ETP) ET Rover Pipeline project for the Marcellus and Utica Shale formations.

Baby Marcellus

The Utica is often presumed to be the next big play, but it’s a relative newcomer.

The U.S. Energy Information Administration (EIA), for instance, did not include the region’s production in its drilling activity reports until August.

The small play got a kick start in October 2013 when Aubrey McClendon’s American Energy Partners LP announced it had raised about $1.7 billion in private equity to pursue business opportunities in eastern Ohio.

That was just a year after the U.S. Geological Survey (USGS) first assessed the Utica, which also covers areas in Maryland, New York, Pennsylvania, Virginia and West Virginia, in October 2012.

The USGS determined the Utica’s technically recoverably natural gas, at the mean, at 38 trillion cubic feet (Tcf). In comparison, the Marcellus, at the time, was assessed at 84 Tcf.

The difference, of course, was that everyone had already dug in the Marcellus, Bakken, Eagle Ford and Permian. The new play attracted investment quickly.

In 2013, the midstream MLP MarkWest Energy Partners LP (NYSE: MWE) also invested $2.3 in the Utica and Marcellus, including construction and operation of two cryogenic processing facilities in the Utica with a total capacity of 325 million cubic feet per day (MMcf/d)—bringing the total processing capacity in the Utica to 385 MMcf/d.

The Marcellus owns the natural gas power position and will continue to do so. EIA estimates its May 2015 production at 16,716 MMcf/d. The Utica will climb just over 2 MMcf/d in May.

But the Utica’s money is continuing to up its production. In May new well gas production will increase by 132 Mcf/d to 4,738 Mcf/d from 4,738 Mcf/d in April, according to EIA estimates. That’s the largest increase of any shale and the third best behind the Marcellus and Haynesville.

And the Utica has some powerhouse producers behind it.

Ohio data from the fourth quarter of 2014 shows companies such as Gulfport, Antero, Eclipse and Chesapeake Energy Corp. (NYSE: CHK) are just getting started.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.