Midstream Companies See Opportunity in This Shale Play

As new shale plays have been discovered and developed over the past few years, they've helped exploration and production companies boost production tremendously. They've also created massive opportunities for midstream companies to provide the infrastructure necessary to support these beehives of activity.

Consider the Permian Basin in Texas, for instance. The play has been producing oil for decades, but the recent application of new technologies has drastically improved recovery rates. For instance, companies like Apache have seen tremendous success in the Permian by drilling longer laterals and employing a greater number of fracking stages.

Others have used secondary and tertiary recovery methods to coax more oil and gas out of the ground. For example, LINN Energy (NASDAQ: LINE  ) has utilized waterflooding, a technique that involves injecting hot water into a reservoir to drive oil and gas into nearby producing wells, in some parts of its Permian acreage.

As production from the basin has soared, pipeline companies have eagerly moved in to capitalize on the region's growth. For instance, Sunoco Logistics Partners, which was acquired for more than $5 billion last year by Energy Transfer Partners (NYSE: ETP  ) , is currently under way with two projects to boost capacity on its existing West Texas pipeline system that serves the Permian Basin.

Similar opportunities await in other plays across the country. One major play worth watching is the Utica, a vast shale rock formation that spans parts of Ohio, New York, Pennsylvania, Virginia, and West Virginia. With several producers looking to ramp up drilling in the play this year, opportunities abound for midstream companies.

Infrastructure hurdles
With the exception of Chesapeake Energy (NYSE: CHK  ) , which drilled fairly actively in 2012 and currently has 14 rigs operating in the play, production growth for most Utica operators remained flat to moderate last year as many of them held off on bringing new wells online. The main reason why they've been reluctant to do so is because of infrastructure constraints.

Harry Schurr, general manager of CONSOL Energy's CNX Gas operations in the Utica, explained: "I need pipelines... If I put a well in the ground, but I can't transport (the natural gas), it's not much good." According to Schurr, pipelines are even more important than roadways and rail access for getting the Utica's oil and gas production to market.

Well, it looks like a handful of midstream companies have heeded the call. As they form joint ventures to provide gas gathering and processing facilities, it looks like relief may soon be on the way for Utica producers.

New infrastructure projects in the Utica
For instance, NiSource (NYSE: NI  ) , an Indiana-based company involved in natural gas transmission, storage and distribution, announced in July that it has entered into an agreement with affiliates of Hilcorp Energy, a privately held energy exploration and production company based in Houston, to build new gathering and processing infrastructure to support gas production in the Ohio and Pennsylvania portions of the Utica Shale.

The joint venture – Pennant Midstream, LLC – will build an initial 50 miles of gas liquids gathering facilities in northeast Ohio and western Pennsylvania with an expected capacity of 400 million cubic feet per day. The joint venture will also construct a gas processing facility that's expected to have an initial gas processing capacity of around 200 thousand cubic feet per day. Both facilities are expected to be in service by the third quarter of this year.

And more recently, Dominion Resources, Virginia's largest utility company, and Caiman Energy II LLC, a privately held firm, formed a $1.5 billion joint venture to provide pipelines and processing services to Utica gas producers in Ohio and Pennsylvania.

The joint venture, known as Blue Racer Midstream LLC, is an equal partnership between the two firms, according to a joint statement the companies released in December. Dominion will supply the assets, while Caiman will contribute the capital necessary for the venture. Midstream operator Williams Partners (NYSE: WPZ  ) , which maintains a 48% stake in Caiman, expects to spend roughly $380 million on the Utica projects over the next couple of years.  

Blue Racer Midstream is expected to allow for outbound gas liquids shipments from Ohio via a long-haul pipeline currently being developed by Williams. The joint venture should provide a greater degree of certainty for Utica producers that have been holding back on bringing new wells online due to uncertainty about infrastructure constraints.  

Final thoughts
As projects like these come online, they should encourage further drilling in the Utica. Caiman's CEO Jack Lafield explained the importance of new infrastructure, saying in an interview: "You can sit down with a producer and he knows the fees he's paying, and the method of getting it from his well to the cash register is well-defined."

It will be interesting to see the scale of the effect that infrastructure improvements will have on producers' drilling efforts. It will also be interesting to see last year's data for Utica wells located in Ohio, which should be released next month by Ohio's Department of Natural Resources (DNR) on its website.

Production data for the Utica has been sparse and many investors are still in the dark about the play's true potential. While the Ohio DNR report will include data only on those wells that produced oil and gas last year, it should shed much-needed light on the productive potential of the play, as well as offer a better glimpse into which zones of the play are most promising going forward.

Chesapeake may have scaled back its expectations about the Utica's oil potential, but it still has several core holdings to help it make the transition away from natural gas production and toward oil. Will the company manage to meet its oil production target and boost cash flow? Or will it languish under the weight of its heavy debt load? 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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