Has the Utica Shale Lost Its Allure?

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I don't think it'd be a stretch to say that the oil and gas industry had big hopes for the Utica, a vast shale rock formation in the Appalachian Basin that stretches as far eastward as New York, though most drilling activity to date has been concentrated in Ohio. Chesapeake Energy's (NYSE: CHK  ) former CEO Aubrey McClendon even called the Utica "the biggest thing to hit Ohio since the plow."

The play even drew initial comparisons to the Eagle Ford of Texas, one of the hottest and most prolific shale plays in the country. Like the Eagle Ford, the Utica was thought to have vast hydrocarbon potential, a massive prospective area, and three zones containing oil, dry gas, and gas liquids.  

With the benefit of hindsight, however, that initial comparison appears shortsighted, as expectations about the Utica's oil potential have been revised downwards. Judging by recently drilled test wells, zones of the Utica though to be rich in oil aren't very porous compared to other shale plays. They're also shallower than the gassier areas of the play, making it more difficult to get oil flowing through the rock.

According to Wood Mackenzie, the Utica will only be producing an average of about 200,000 barrels of oil per day by 2017 – just a fraction of the 1.15 million barrels a day the Eagle Ford will be producing, according to the consultancy's projections.  

Major operators selling Utica assets
Not surprisingly, some of the play's biggest leasehold owners are putting their acreage up for sale. Chesapeake Energy, the play's largest leasehold owner, recently put 94,200 acres up for sale. Though the company, which discovered the Utica in 2010, was initially extremely optimistic about the play's potential, it has since scaled back its expectations about how much oil the play might contain.

Devon Energy (NYSE: DVN  ) also recently put up about 157,000 net acres for sale. With its expectations tempered by disappointing results from some of its oil wells, the company has decided to focus on more profitable opportunities.

Houston-based EnerVest has also placed acreage for sale through its master limited partnership EV Energy Partners (NASDAQ: EVEP  ) , after initial results came in under expectations. The MLP's CEO, Mark Houser, said the decision to sell out of the Utica was because oil production doesn't fit its low-cost business model.  

As prices for Utica acreage fall, recent transactions now appear expensive. For instance, Gulfport Energy (NASDAQ: GPOR  ) paid about $10,000 per acre for roughly 22,000 acres back in February, which is significantly more than the average selling price of between $1,000 and $8,000 an acre for Utica acreage. However, the company is primarily targeting natural gas liquids, for which its acreage may be ideal.  

Final thoughts
Even though recent asset sales seem to indicate that the Utica's prospects are fading, not all hope is lost. Some operators' results for natural gas and natural gas liquids have been quite impressive, suggesting that the Utica may simply turn out to be a gassy play with greater quantities of gas liquids as opposed to oil.

And even though some efforts at coaxing oil from deeper regions of the shale haven't panned out too well, that doesn't necessarily mean the play should be written off for oil just yet. If operators can find ways to overcome the challenges of getting oil flowing through rock, there may still be a way to produce quite a decent bit of oil. 

Though Chesapeake may have scaled back its expectations about the Utica's oil potential, the company 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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