Chesapeake Still Optimistic About the Utica

The Utica -- a shale formation underlying vast tracts of the Appalachian Basin -- has attracted a significant amount of interest over the past couple of years. Though relatively little is known about its productive potential, encouraging initial test results in Ohio have drawn a bevy of energy companies into the emerging shale play.

Chesapeake Energy (NYSE: CHK  ) was the first entrant, having discovered the play back in 2010. Initially, the company was highly enthusiastic about the Utica's potential. As late as May 2012, outgoing CEO Aubrey McClendon expressed a great deal of confidence that Chesapeake would report solid oil production numbers from its acreage in the play.

But by November, McClendon had changed his mind, suggesting that the Utica was unlikely to account for a significant portion of the company's oil production going forward.

Despite this recent change of opinion, however, the company remains bullish on the play's overall potential. McClendon even characterized the Utica as one of Chesapeake's "foundational plays for decades to come."

Chesapeake in the Utica
After discovering the Utica a few years ago, Chesapeake remains one of the most active operators in the play. As it stands, it is the largest leasehold owner, boasting approximately 1 million net acres. To date, it has drilled a total of 184 wells in the play, of which 45 are currently producing.

Though production in the Utica over the past year was fairly insignificant, the company said it plans a "significant ramp up" this year. With 14 rigs currently operating in the play, Chesapeake expects output to reach as high as 55,000 boe per day by year-end.

Of Chesapeake's total acreage in the Utica, roughly a third is thought to lie in an oil-rich zone. But, as the company mentioned in its most recent earnings conference call, it will focus its future efforts primarily on drilling in the Utica's wet gas window, inside of its joint venture with Total SA, where it boasts 450,000 net acres. Within this area, the company forecasts expected ultimate recoveries (EURs) of 5-10 bcfe.  

Like the company's operations in its other core holdings, especially the Eagle Ford, Chesapeake has experienced substantial efficiency gains in the Utica. Average per-well drilling and completion costs have declined nearly 30% year over year, while spud-to-cycle times have come down to just 22 days, a nearly 40% decrease from 35 days a year ago. 

Encouraging well results
A recent well that the company drilled in Carroll County -- the Co 34-12-41H -- posted a staggering 24-hour initial production (IP) of 2,225 boe per day, of which a third was liquids. Encouraged by the results, the company's COO Steve Dixon commented in the fourth quarter earnings conference call: "We believe we've captured the industry's largest position in the Utica, and look forward to solid results in this play for years to come." 

Though Chesapeake's wells have posted some of the best production figures to date, it's not the only company seeing success in the Utica. Other operators' horizontal drilling results – mainly in the play's wet gas window – have also been promising.

For instance, Devon Energy's Chumney Family Trust IH well in Guernsey County reported 448 bbl/day, and 1,203 Mcf/day. Gulfport Energy's Groh 12H well, also in Guernsey County, produced 1,816 bbl/day and 2,800 Mcf/day.

Anadarko's Spencer 5H, in Guernsey County, posted 415 bbl/day and 406 Mcf/day, while its Brookfield 3H well, in Noble County, produced 598 bbl/day and 785 Mcf/day. And CONSOL Energy's Troyer 3H well in Tuscarawas County reported 400 bbl/day.  

Easing infrastructure constraints to fuel further growth
Going forward, Chesapeake expects stronger production growth in the play, as infrastructure constraints ease further. One major addition with respect to improved gas processing infrastructure will be Dominion's natrium processing plant in Marshall County, West Virginia, which is expected to go online next month .

This will be followed by the addition of three processing trains at Momentum's Kensington plant in Columbiana County, Ohio, the first of which is expected to be operational by the middle of this year and the second scheduled to go online before the end of the year .

Final thoughts
As Chesapeake works to turn things around, it will focus on balancing its production mix – away from natural gas and toward liquids – and cutting production costs. In addition, it will continue with the asset sale strategy it embarked upon last year, as it works to reduce leverage, and raise much-needed cash.

For 2013, the company says it's aiming for 27% liquids production growth, which should make liquids roughly 26% of its total production mix by year-end. The key growth engine expected to fuel this increase is the Eagle Ford play in Texas, where the company is the second largest leasehold owner, commanding 485,000 net acres. 

Chesapeake may have scaled back its expectations about the Utica's oil potential. But it still has a handful of core holdings, including the Eagle Ford, to help it 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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