Placing Bets on the Utica Shale

It's official: Eastern Ohio is the place to be. Forget the Marcellus: Natural-gas producers have decided the Utica Shale is The Next Big Thing.

What we have here, Fools, is a good-ol'-fashioned land grab. Much to no one's surprise, Chesapeake Energy (NYSE: CHK  ) , the second-largest natural-gas producer in the United States, controls 1.25 million acres already. ExxonMobil (NYSE: XOM  ) is also on board, though it's playing the shy, silent type and refuses to disclose any information other than that it has acquired land. Finally, Hess, refusing to be left out, secured 185,000 acres earlier this month.

Here is a snapshot of some other companies seeking to lay claim to a portion of the 108 million acres (170,000 square miles) that make up the Utica Shale.

Company

P/E (TTM)

EPS

Debt/Equity

Dividend Yield

Chesapeake Energy 18.33 1.50 65.25 1.30%
ExxonMobil 9.45 7.59 10.19 2.70%
Hess 6.59 8.21 29.31 0.80%
Devon Energy
(NYSE: DVN  )
4.22 13.60 37.01 1.20%
Anadarko Petroleum 41.45  1.68 59.18 0.50%
EV Energy Partners
(Nasdaq: EVEP  )
59.8 1.17 54.62 4.30%
Rex Energy
(Nasdaq: REXX  )
N/A (0.02) 23.16 N/A
Gulfport Energy
(Nasdaq: GPOR  )
14.32 1.65 9.32 N/A
Magnum Hunter Resources
(NYSE: MHR  )
N/A (0.42) 23.07 N/A

Source: Yahoo! Finance.

Chesapeake definitely has every advantage going into this Battle Royale. The company plans to profit from drilling 12,500 wells on part of its land and shopping the rest of it to the other drillers.

Analysts are encouraging investors to consider the smaller outfits like Rex Energy, Gulfport Energy, and Magnum Hunter Resources for two reasons. First, although it's important for ExxonMobil to establish itself in the play, success here isn't likely to set its stock price on fire, as it would a smaller company. Second, success for a small outfit in the Utica can make it much more desirable for potential buyers in an industry that's hot for mergers and acquisitions right now. Gulfport Energy plans to begin drilling its 30,000 acres next year.

Things to keep an eye on
There are two potential glitches to success in the Utica Shale: resource uncertainty and the environmental issues surrounding hydraulic fracturing, or fracking.

Only 16 wells have been drilled in the Utica so far. Most companies claim that the area is geologically similar to other successful shale plays, but it's really too early to say for sure, especially given the region's size. Take Chesapeake, for example: It has the largest holding and has done extensive testing, but only on nine wells.

The other problem for the Utica is the fierce battle over fracking. Though initial drilling is off the less infamous vertical variety, horizontal fracking will commence once wells have been drilled deep enough to penetrate the shale.

Regardless of your stance on this particular method of drilling, to say the controversy has caused some problems for energy companies is an understatement. It's become so contentious that some New York landowners are trying to get out of their leases with drillers and in Pennsylvania, and two residents personally paid for anti-drilling billboards. And this wouldn't be America without costly lawsuits, so there are a few of those to go around as well.

Foolish bottom line
Companies looking to make the most out of the Utica play will have to do a better job communicating with the public to avoid the sort of problems that follow hydraulic fracturing wherever it goes. If they can do that and the play yields as much gas as E&P outfits think it will, investors will have a bevy of drillers to choose from.

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Fool contributor Aimee Duffy doesn't own shares of the companies mentioned in this article. If you have the energy, check out what she's keeping an eye on by following her on Twitter, where she goes by @TMFDuffy.

The Motley Fool owns shares of Devon Energy. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 28, 2011, at 9:45 AM, mhorse55 wrote:

    thousands of wells and no positive proof that fracking is bad for the water table. just another attempt to stall progress on getting away from overseas oil. wake up america!!!!!!!!!!!

  • Report this Comment On September 28, 2011, at 10:17 AM, midnightmoney wrote:

    two billboards? Everybody I know in Otsego county NY has anti-fracking signs in their yard. The oil companies face mountains of resistance here, and rightly so until they prove not only that fracking isn't going to hurt anyone, but also not destroy the quality of life (strange concept, doesn't involve money) people live here for to begin with.

  • Report this Comment On October 01, 2011, at 4:56 PM, ciepievc wrote:

    "The other problem for the Utica is the fierce battle over fracking. Though initial drilling is off the less infamous vertical variety, horizontal fracking will commence once wells have been drilled deep enough to penetrate the shale."

    I am new to these companies. Why is horizontal fracking more beneficial/productive than just vertical?

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