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Published: Jul 28, 2011
By Mikaila Adams
Chesapeake Energy (NYSE: CHK) released its second quarter 2011 financials July 28, and with the release came confirmation from the oil and natural gas producer that it believes the liquids-rich Ohio Utica Shale to be economically viable.
As part of its report, Chesapeake noted successful results from six horizontal and nine vertical wells drilled in its Utica shale holdings, and based on its proprietary geoscientific, petrophysical and engineering research during the past two years, said its “industry-leading 1.25 million net leasehold acres in the Utica Shale play could be worth $15 - $20 billion in increased value to the company.” Analysts at Baird Equity Research say the results constitute an implied acreage valuation of $12,500-$16,667 per acre.
Chesapeake targets the Utica
When the Oklahoma City-based company purchased roughly 500,000 net Appalachian acres from privately-held Anschutz Exploration in the fall of 2010, Jefferies & Co. Inc. speculated that the natural gas producer was targeting the Utica Shale. Along with the acreage, the company purchased some production in Pennsylvania, Ohio, and NY for roughly $850 million.
In what some may see as most compelling about the report is the direct comparison to the much publicized Eagle Ford Shale. The company believes the Utica Shale “will be characterized by a western oil phase, a central wet gas phase and an eastern dry gas phase and is likely most analogous, but economically superior to, the Eagle Ford Shale in South Texas.”
The Utica Shale occurs in outcrops in New York and in the subsurface in the provinces of Quebec and Ontario in Canada. It is also found in the states of Pennsylvania, West Virginia, and Ohio.
One estimate puts an estimated 20 trillion cubic feet of natural gas in the Utica Shale, and while it offers some unique challenges—a higher carbonate content and lower clay mineral count than the Marcellus as well as significant depth and a lack of information surrounding the play—producers are cautiously optimistic that advances in technology utilizing multi-stage hydraulic fracturing and horizontal drilling techniques can unlock the play’s potential.
Activity ramp-up
Going forward, Chesapeake plans to ramp up its activity in the play where it holds 1.25 million net leasehold acres. The company is currently drilling with five operated rigs and anticipates increasing its rig count to eight by the end of 2011, and up to 20 rigs by year-end 2012. By 2014, the company plans a ramp up to 40 rigs by year-end 2014.
Citing “persistent and significant oilfield service inflation” along with its accelerated Utica Shale drilling program, the company has increased its planned drilling and completion capital expenditure budget for 2011 and 2012 by $500 million to a range of $6-$6.5 billion in each year.
And, as the company has done with its other shale play acreage, joint ventures and/or other monetization alternatives are expected to be utilized, with at least one transaction expected to be completed by the fourth quarter of 2011.
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