Is the Utica Shale the Next Big Play?

Not all shales are created equal, though you'd never know it based on all the hype about U.S. energy production right now. After Michigan's Collingwood Shale quickly went bust, many are wondering if the Utica Shale -- compared to proven, prolific shales like the Eagle Ford and the Marcellus -- will ever pan out for producers.

What is the Utica shale?
The Utica shale is one of about 30 geologic formations that hold oil and natural gas in the Appalachian Basin. Right now, most of the energy produced in the state comes from the Clinton formation. The upside to the Utica, which is buried below the Marcellus shale, is that many think the mature layer contains oil and natural gas liquids, in addition to dry gas. Though the shale stretches across New York and Pennsylvania, the majority of the oil is believed to sit under the ground in Ohio. 

Ohio's Department of Natural Resources estimates there is between 1.3 billion and 5.5 billion barrels of oil in the Utica Shale.  Those numbers vary significantly from the USGS' recent analysis, which estimated the shale holds 590 million to 1.39 billion barrels of oil. 

The disparity is part of the ongoing mystery of the Utica. Ohio's opaque energy policy makes it increasingly difficult to get a handle on the true future of energy production there.

State secrets
After significant lobbying efforts by the energy industry, there is now a law on Ohio's books that prevents regulators from reporting monthly or quarterly production numbers to the public. Instead, production numbers may only be released once a year. Other energy producing states release numbers on a monthly basis, and as the Chicago Tribune pointed out last week, even the once ultra-secretive Saudi Arabia now publicly reports its numbers every month. 

In the release of its Utica Shale analysis, the USGS is quick to point out the importance of sharing energy resource information with the public:

"Understanding our domestic oil and gas resource potential is important, which is why we assess emerging plays like the Utica, as well as areas that have been in production for some time...Publicly available information about undiscovered oil and gas resources can aid policy makers and resource managers, and inform the debate about resource development."

Apparently, despite the value of releasing information, operators in Ohio don't want to give up the competitive edge you gain when no one knows what you're doing or how much you're producing. Plenty are skeptical and suspect that energy companies are merely buying time and hoping to hit a big well to justify Utica sunk costs, but we really have no way of knowing if this is really the case.

Regardless of why companies really behave this way, investors must adapt or ignore this resource all together, the latter becoming increasingly more difficult as companies continue to pump resources into the shale.

Winners, maybe
The major concern for investors is that the Utica shale is a complete dud. Despite early comparisons to the Eagle Ford shale in Texas, the Utica is just not producing the way many thought it would. For example, after one year of shale drilling in the Eagle Ford, oil production increased 10 times over, to 120,000 barrels per day in 2011. Right now, production there is right around 300,000 bpd. Ohio pumped 13,000 bpd last year, and every year before that, going back about 10 years. More recent numbers are unavailable, naturally.

With that in mind, let's take a look at a few companies operating in the Utica, hoping things pan out.

Chesapeake Energy (NYSE: CHK  ) operates 25 of the 33 producing wells in the shale. The company is the largest leaseholder, controlling more than 1 million net acres. Chesapeake expects to have 15 rigs operating in the Utica by year's end.  CEO Aubrey McClendon says that secrecy benefits shareholders , and really, if you can't trust Chesapeake Energy, who can you trust?

Gulfport Energy (Nasdaq: GPOR  ) is a much smaller player, but it has one of the best producing wells in the shale so far. Its Wagner 1-28H well produces 14 million cubic feet of equivalent per day, but only 432 barrels of oil.

This highlights another important point about the Utica. While the USGS anticipates a much lower volume of oil trapped in the shale, the Ohio's Department of Natural Resources, its estimates for natural gas are much higher, ranging from 21 trillion cubic feet to 61 tcf. This may not help Ohio, sitting over the "oily" part of the shale, but it does mean that it at the very least, the Utica shale will have value for natural gas producers.

Which brings me to the next two companies on our list: MarkWest Energy Partners (NYSE: MWE  ) and EV Energy Partners (Nasdaq: EVEP  ) . Both of these midstream companies are developing facilities to process natural gas and natural gas liquids produced in the Utica shale. EV Energy Partners is developing $900 million in midstream infrastructure in eastern Ohio, while MarkWest is poised to become the top midstream provider in the Northeast once its current projects in the Marcellus and Utica shales come on line.

Foolish takeaway
The Utica shale may not be the next Eagle Ford, but it may very well run a close second to the Marcellus shale. Investors may want to wait until Ohio releases production data in April to get a better picture of what's going on before getting on board.

In the meantime, take a look at one incredible natural gas company that presents a rare "double-play" investment opportunity today. We're calling it The One Energy Stock You Must Own Before 2014, and you can uncover it today, totally free, in our premium research report. Click here to read more.

Fool contributor Aimee Duffy has no positions in the stocks mentioned above.  Click here to see her holdings and a short bio. 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 has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, short JAN 2014 $15.00 puts on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls 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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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 October 29, 2012, at 11:54 AM, kthor wrote:

    LOL funny when i read this "After significant lobbying efforts by the energy industry, there is now a law on Ohio's books that prevents regulators from reporting monthly or quarterly production numbers to the public. "

    I thought about CHK right away, then i read more and 100% correcto

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