The Utica's Potential Glimpsed in Chesapeake's Results


After discovering the Utica Shale in 2010, Chesapeake Energy was initially highly optimistic about the play's hydrocarbon potential. Though it has since dialed back its expectations, its most recent well results in the play are highly encouraging.

Chesapeake remains the largest leasehold owner in the play, commanding roughly 1 million net acres. It is also by far the most active driller, having drilled more than 240 wells to date - representing about three-quarters of all wells drilled in the entire play.

However, due to infrastructure constraints, the company is selling production from just 54 of those wells and is therefore only producing 75 million cubic feet of gas equivalent per day net to the company.

Chesapeake expects infrastructure constraints to ease substantially, which it reckons should allow for a substantial ramp-up in production.

Infrastructure additions bode well for Utica production
A few of the coming improvements in gas processing infrastructure will include Dominion's natrium processing plant in Marshall County, W.V. - expected to go on line shortly - and three processing trains at Momentum's Kensington plant in Columbiana County, Ohio, two of which are expected to be operational before the end of the year.

Chesapeake is not alone in pointing out the Utica's lack of processing infrastructure as a major hindrance. Several operators, including CONSOL Energy , have cited infrastructure constraints as the single biggest reason for Utica producers' reluctance in bringing new wells on line.

But that looks set to change shortly, as a handful of companies are eager to provide Utica producers with the infrastructure they so desperately require. For instance, midstream company Williams Partners , through a 48% stake in a privately held company, plans on shelling out roughly $380 million over the next couple of years on a joint venture with Dominion that will provide pipelines and processing services to Utica producers.

Chesapeake's Utica wells
As evidence of the play's potential, acting CEO and COO Steve Dixon highlighted recent well results in Carroll County, Ohio: "We drilled six wells from a common pad with average 24-hour stricted test rates of 1250 BOE per day, which includes 310 barrels of oil. 200 barrels of NGL with ethane not recovered and 4.4 mmcf of natural gas per day. This is a flowing tubing pressures exceeding 3000 [PSI]."

He added that well production data recently submitted to the Ohio Department of Natural Resources, in compliance with the department's annual disclosure of Ohio production data, is "not indicative of the productive capacity of the initial wells drilled."

Assuming the timely start-up of crucial gas processing infrastructure in subsequent months, Chesapeake reckons it can produce more than 330 million cubic feet of gas equivalent or 55,000 barrels of oil equivalent per day from the Utica by year's end. That implies production would more than quadruple from current levels.

What next?
Chesapeake's operations in the Utica this year will be focused primarily on drilling within the play's wet gas window, where it commands 450,000 net acres through a joint venture with Total . In this portion of its acreage, the company is projecting ultimate reserve recoveries of 5 billion-10 billion cubic feet of gas equivalent per well, depending on location and commodity mix.

Though the company has acknowledged that the Utica will not play a major role in helping it meet its liquids production target for the year, Chesapeake nonetheless remains optimistic about the play's potential, with Dixon even characterizing its resource base as "prolific."

While debt-related challenges continue to cast a dark cloud of uncertainty over Chesapeake's future, few would question the superb quality of its remaining oil and gas assets. For many investors, the important question is whether Chesapeake's current share price reflects the true value of its assets. To answer that question and to learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy, and as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.

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Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Dominion Resources and Total SA. (ADR). The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts 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.

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