A couple of years ago, Chesapeake Energy's (NYSE:CHK) outgoing CEO Aubrey McClendon touted the Utica Shale as "the biggest thing to hit Ohio since the plow." In mid-2011, he even went so far as to claim that the 1.3 million acres of Utica property that Chesapeake had leased contained hydrocarbons worth roughly $20 billion.
But since that time, McClendon has scaled back his expectations about the Utica's oil potential substantially, as have executives at some other major companies operating in the play. This waning optimism, fueled by wells that yielded far less oil than initially expected, has led some commentators to question whether or not the play will live up to its initial hype.
As Utica drillers continue to derisk their acreage, will they stumble upon huge reserves of oil? Or will the Utica's initial comparison to Texas' prolific Eagle Ford prove overblown? Let's take a look.
Any black gold? Or just a lot of gas?
To be sure, the Utica has yielded impressive quantities of dry gas and natural gas liquids thus far. But skeptics are worried that the play's proportion of oil to natural gas and related liquids may end up being disappointingly low.
For instance, in the second quarter of last year, Devon Energy (NYSE:DVN) reported disappointing results from two wells it drilled in the oilier portion of the play. Arousing further suspicion that Devon may be giving up on the play, the company recently announced that it was looking to divest its Utica assets. In January, it placed some 244,000 of its gross acres (195,000 net) in the liquids-rich portion of the Utica in eastern Ohio up for bidding.
Yet while Devon's retrenchment is discouraging, some operators' results give reason for hope and suggest that some portions of the Utica may be brimming with oil. For instance, Gulfport Energy (NASDAQ:GPOR) reported that its first 10 Utica wells averaged a peak rate of nearly 800 barrels of oil per day, plus 10 million cubic feet of natural gas and nearly 1,200 barrels of natural gas liquids.
At any rate, it's tough to make a call on the Utica right now since the play is still very much in its infant stages and relatively very little is known about its various zones' geologies and productive potentials. Drilling thus far has been of the experimental kind, as producers seek to get a better understanding of their acreage.
Contributing to the paucity of information about the play is Ohio's lack of transparency in releasing data on oil and gas wells drilled in the state. As a Reuters analysis highlighted, Ohio state regulators only require Utica operators to disclose production statistics on an annual basis. In contrast, most other states publicly disclose production statistics and drilling data on a monthly basis.
Has the Utica's oil potential been overstated?
The lack of data is compounding some investors' fears that the Utica may turn out to be a flop. Even Chesapeake, the first company to charge confidently ahead into the Utica, recently announced that it no longer views the play as central to its oil production growth.
Initially, the company was unabashedly optimistic about the play's oil potential, even announcing in May of last year its plans to ramp up drilling activity significantly in the play's oilier portions. But in subsequent presentations and SEC filings, it has completely de-emphasized oil drilling in the Utica, instead reverting its stated focus toward drilling in the play's wet gas and dry gas windows.
While only time will tell what the Utica's potential will actually be, the wide variation in different producers' well results suggests that the location of acreage will be crucial in determining the proportions of oil to natural gas and natural gas liquids. For instance, consider the fate of different operators in another highly publicized shale play – the Marcellus.
Marcellus shows that acreage location matters big time
With the domestic glut of natural gas having driven prices far below historical norms, producers operating in the Marcellus wet-gas window are faring relatively well, while rigs operating in the dry gas portions of the play have all but disappeared.
For instance, Range Resources (NYSE:RRC) is planning on directing roughly 80% of its $1.3 billion capital budget toward drilling operations in the Marcellus. This is mainly because the company is aptly positioned in the wet-gas window of the play, which allows it to realize higher profit margins for its natural gas liquids production.
Meanwhile, EXCO Resources (NYSE:XCO) has slashed its rig count from four to one and is heavily downsizing its regional headquarters. Similarly, Talisman Energy (UNKNOWN:TLM.DL), which also currently only has one rig running in the play, has reduced its capital allocation to the Marcellus by 65% and instead diverted its focus to the oilier Eagle Ford Shale in Texas.
The divergence in these companies' fortunes is a sobering reminder that it's not just the size of the acreage that matters. What matters more is where those acres are located, the economics and productive potential of the underlying formations, and the mix of hydrocarbons they contain. The same is sure to be true for companies drilling in the Utica.
Finding that crucial sweet spot, where oil flows as freely as wine in Napa Valley, will be the big challenge for Utica producers. However, as these companies continue to derisk their acreage, one or more is bound to stumble upon a lucrative oil window. In fact, Utica drillers may be closer than ever to zeroing in on this fabled zone.
According to industry officials' comments earlier this month, a zone east of Interstate 77, which runs south from Portage County through Trumbull, Mahoning, and Columbiana counties and into Stark County, may represent the richest portion of the Utica's oil window.
According to The Cleveland Plain Dealer, the spokesman for industry group Energy in Depth said that more core samples from test wells and drilled wells are needed to better understand the region’s liquids potential. As more tests are conducted and more data released, drillers should gradually be able to get a much better understanding of the Utica’s oil potential.
In addition, new production data set to be released next month by Ohio's Department of Natural Resources should provide a much better understanding of different zones' resource potentials, as well as offer a glimpse into which Utica drillers have secured the best acreage. Investors interested in the data can check it out on the DNR website.
Editor's note: In a previous version of this article, Energy in Depth’s Shawn Bennett was misquoted. Energy in Depth does not drill nor evaluate core samples as previously implied. The Motley Fool regrets this error.
Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Range Resources. The Motley Fool owns shares of Devon Energy and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts 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.