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Chesapeake’s Big Opportunity in the Utica Shale

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Though Texas' Eagle Ford shale will be the primary driver of Chesapeake Energy's (NYSE: CHK  ) oil production growth during the next few years, the company's acreage in Ohio's Utica shale will be a crucial contributor to its natural gas liquids (NGLs) production growth.

Chesapeake in the Utica
After discovering the play back in 2010, Chesapeake was one of the first companies to recognize its potential. Today, it is the most active driller and largest leasehold owner in the Utica, with approximately 1 million net acres under its belt.

According to recent data from Ohio's Department of Natural Resources, the comapny produced 372,212 barrels of oil, and 10.1 million mcf of natural gas from the play last year, and lay claim to five of the top 10 producing Utica oil wells in the third quarter. Not surprisingly, Chesapeake's third-quarter net Utica production surged 91% year over year to average approximately 164 million cubic feet of natural gas equivalent per day.

While that's a truly impressive rate of growth by any measure, it could have been even higher. One of the main impediments to the company's production growth in the Utica has been infrastructure constraints. For instance, the company reported that it still had a total of 208 wells that were in various stages of completion as of the end of the third quarter, with many awaiting a pipeline connection.

Infrastructure improvements in the Utica
But with Utica gas processing and pipeline takeaway capacity expected to expand significantly this year, this should change. Already, gas processing capacity from the Kensington plant -- a joint venture between Access Midstream Partners (NYSE: ACMP  ) , EV Energy Partners (NASDAQ: EVEP  ) and M3 -- has doubled with the addition of a second train in December. Access Midstream and EV Energy are also in the process of laying gathering pipelines to deliver Chesapeake's production to the plant.

The next big project that will improve Chesapeake's takeaway capacity from the Utica will be Enterprise Products Partners' (NYSE: EPD  ) Appalachia-to-Texas Express, or ATEX, pipeline, a 1,230-mile line that will transport natural gas liquids (NGL) from the Utica to the Texas Gulf Coast. The project should come online any time now, and will allow Chesapeake to increase its shipments of ethane to the Gulf Coast.

ATEX will have an initial capacity of 125,000 barrels per day that could be expanded to as much as 260,000 barrels per day depending on demand. Chesapeake, which has contracted a whopping 75,000 barrels per day of capacity on the line, will be one of the biggest beneficiaries of its completion. Range Resources and Antero Resources will also benefit, because each of them have also contracted 20,000 barrels per day of capacity on the line.

As a result of these projects, Chesapeake expects to double its gross processing capacity in the Utica from 400 million cubic feet per day as of the end of 2013, to 800 million cubic feet per day by the end of this year. This will allow the company to connect many of those backlogged wells to sales, and boost its production.

What's next for Chesapeake?
Despite planning to spend about 20% less this year than it did last year, Chesapeake expects to deliver 8%-10% year-over-year production growth in 2014, consisting of 8%-12% oil production growth, 44%-49% natural gas liquids growth, and 4%-6% natural gas production growth.

In the Utica, the company will continue to target mainly oil and natural gas liquids opportunities, as opposed to dry gas. At its recent 2014 outlook and capital program conference call, chief financial officer Nick Dell'Osso said the company expects to recover significantly more ethane from the Utica this year than it did in 2013.

The bottom line is that, while Chesapeake's Eagle Ford operations will continue to be the key driver of its oil production growth, the Utica will be crucial in boosting the company's production of natural gas liquids. Investors should check out Chesapeake's update on its Utica shale operations, which it plans to provide at an upcoming investor-day program on May 16.

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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