Will OH Utica Turn Out to be Steak, or Just Sizzle? Eye on April

sizzle or steak Ohio will soon compile and release annual production numbers for Utica Shale wells drilled and in production during 2012. Ohio is one of the “least transparent states” when it comes to reporting energy output with annual filings. Drillers are required to provide production numbers for 2012 by March 31. Last year the Ohio Dept. of Natural Resources (ODNR) posted production numbers in just a few days—on April 2nd. However, last year’s reporting (from 2011) was for 5 wells—all from Chesapeake. This year the reporting will be from multiple drillers for 50-60 wells. Everyone is waiting, with baited breath. There’s a lot riding on the numbers reported this year.

Will the Utica numbers turn out to be like the Eagle Ford—a play prolific in profitable oil and natural gas liquids? Or will it be more of a less-profitable, methane-only play? A Reuters article takes a look at that question. The article also highlights some interesting information for just how far production numbers have fallen from initial peak rates for a pair of Gulfport wells…

Energy producers in the Buckeye State have compared the Utica to the giant Eagle Ford shale play in Texas and declared it a boon for a state still weathering an economic downturn. However, enthusiasm has cooled somewhat since drilling began in 2011, after wells produced more cheap natural gas than the more lucrative oil.

While around 500 drilling permits have been issued in the state since 2011, only those wells that have actually produced will be covered in the report. It will show output over the lifetime of every new well, its location, and its owner, providing some proof of which acreage, and which companies, are performing best.

"It is a meaningful sample of wells that will go a long way toward giving investors a sense of whether the Utica is the next big thing," said Morningstar analyst Mark Hanson, who covers companies operating in the state.

Since [the 2011 report], a long list of companies, including Britain’s BP, Anadarko Petroleum and Hess Corp, have acquired acreage in Ohio. Most remain quiet about their progress for fear that it will push lease prices higher.

"It has to do with the competitive nature of things," said Mark Houser, chief executive officer of EV Energy Partners which, together with its parent company Enervest Ltd, owns more than 800,000 acres in the Utica. "If you have a good acreage position, you still may want to buy the acre next door. You don’t want to have everything public."

Meanwhile, smaller companies such as Gulfport, Rex Energy and Magnum Hunter Resources, with a proportionately bigger stake in the Utica, have more to lose if the play turns out to be a dud.

Of the smaller companies, Gulfport’s share price has shown the most remarkable rise since the first half of last year and the company in many ways encapsulates both the hype about the Utica and the difficulty in deciphering its true potential.

Since June, 2012, when it announced it had drilled its first three Utica wells, Gulfport’s share price has risen 156 percent, from below $17 to more than $43 on March 18, as the company began reporting initial flow rates from the new wells.

But as the April deadline for reporting well production looms, experts will be watching closely for whether Gulfport’s preliminary data holds up to further scrutiny.

"Ultimately, the production and estimated ultimate recovery of our wells and those of our peers will provide definitive answers," said Paul Heerwagen, Gulfport’s director of investor relations.

The company, which owns 128,000 net acres in the Utica, published impressive "peak rates" of gas and condensates from its Utica wells, a measurement of initial flows taken over a limited time period, usually no longer than 24 hours. A peak rate is typically much higher than eventual longer term output that declines over time.

"The peak rate is more a bragging type thing," said Randall Collum, a natural gas production analyst at data provider Genscape. "It is nice to know and gives some indication of potential production, but I would rather get a longer term outlook."

During a quarterly conference call with analysts on Feb 27, Gulfport chief executive James Palm revealed longer term rates for two wells, which had fallen off significantly from the first flows.

Natural gas output from the Wagner 1-28H well fell from a peak rate of 17.1 million cubic feet per day reported on August 7 to an average of 5.2 million cubic feet per day after 129 days of production. Output of gas condensates fell from 432 barrels per day to 94 bpd.

Decline rates are normal, and Gulfport executives said on February 27 that output from the Wagner well has increased slightly since the end of the year.

Gulfport is not alone in reporting peak rates. Rex Energy chief executive Tom Stabley said he was "very excited" about output from three new Utica wells in a statement on March 18 that disclosed 24-hour test rates for the wells.

But the speed of the declines in the Gulfport wells, and the scarcity of longer term data, makes it hard for investors to judge whether it will be a good long-term investment.

"The first four months show that the peak rate was not over-representative of what could ultimately be recovered from the well," said Morningstar’s Hanson.*

There’s quite a bit more to the article. Click the link below to read it.

*Reuters/Fox Business (Mar 25, 2013) – Insight: In Ohio, the fog begins to lift over the Utica shale