CEO Frank Tsuru of Houston-based M3Midstream is investing over $1B across Eastern Ohio in a
rush to get into the Utica ballgame. His enthusiasm is generated by the incredible profit
margins which his company projects for Utica operators. He claims that based upon well results
to date, producers will achieve an internal rate of return of 91% over the life of the well(s).
Incredibly, he claims that dwarfs even “the next-best shale play, the Eagle Ford in south Texas”.
Producers there, according to Mr. Tsuru, have an average rate of return of about 60%. These
numbers all obviously tower over those of dry gas shale plays, including the Haynesville,
currently returning only 4% internally, and an area with little to no drilling activity.
Now that we have established some basic parameters regarding completion cost and
production figures, we can comment intelligently about the economics of a typical Utica
completion in Ohio. For the purposes of our analysis, we will have to establish the following
two assumptions: 1) well cost of about $6.5 M each (from CHK stockholder reports), and 2) sustained production of 750 boe per day on average (a quite conservative figure, one that allows some consideration towards expected decline curves).
Without a lesson in detailed accounting, including that specific to the industry, let us evaluate
the value of a typical completion. One way is to determine the value of a figure known as
PV-10% per well. This is a term specific to the industry which reflects the NPV (net present
value) of an asset or activity after discounting expected cash flows (before taxes or interest) by
10% per year. This is one manner in which the SEC allows exploration companies to disclose
the estimated value of their reserves as of a particular stated date. Alternatively, it may be
used to determine the effective ROI (return on investment).
Let us analyze comments made by Cimarex Energy to their investors during a July 12, 2012
presentation. They were reporting on two recent Bone Springs (Permian Basin) completions
which they described as having the highest rate of return of any assets in the entire company’s
portfolio, claiming the results compare favorably to the Bakken and Eagle Ford, once drilling
costs are taken into effect. Based upon this analysis, they are reportedly aggressively adding to
their acreage position there.
The two wells analyzed during their presentation produced at 600 boe/d (at a cost of $6.5 M to
drill) and 850 boe/d (at a cost of $7.5-$8.0 M to drill) respectively. If our figures regarding
assumptions for completion costs and average production rates are reasonably accurate, it is
clear that our economics would be even more impressive. Perhaps 125% superior or more,
depending. These wells did have a large percentage of production labeled as “oil” but no details
regarding specific production mixes.
During the same presentation, Cimarex also reported on two recent Wolfcamp Shale
completions. At a cost to drill of about $8-$8.5 M and production of 250 bbl/day oil and 340
bbl/day NGL’s (apparently averaged between the two wells), their completions translated into a
roughly 20-30% after-tax rate of return, a figure management seemed quite proud of. Again,
our average Utica completion will certainly meet or exceed these figures, especially after
adjusting for difference in production (higher) and drilling costs (lower). The production mix
reported to be 47% gas, 23% oil, and 30 NGL’s should also be comparable, and not require us to
make complex adjustments in comparing the two prospects.
Conclusion? If Cimarex considers these to be the highlights of their entire portfolio, they would
be damn proud to be possessing Utica holdings. Believe me, their expectations regarding
return on investment and as to stockholder profits are similar to every other participant in the
industry. No wonder 7 of the top 9 largest E&P companies are already represented here. You
can be assured they are all quite aware of recent ODNR estimates showing Utica potential of as
much as 5.5 B bbl oil and up to 15.7 tcf of natural gas (assuming a 5% recovery factor). An
Energy Analysts International, Inc. associate was quoted by Business First on 9/14/12 as having
predicted the Utica to become the third-largest continental production formation, potentially
pumping as many as 500,000 boe/day, a figure equating to 1% of total recoverable US
resources. Note: the USGS (U.S. Geological Survey) released a report dated 10/9/12 which
estimated “recoverable” Utica reserves to be in excess of 38 trillion cubic feet of natural gas
and over a billion barrels of undiscovered oil. As per Keith Kohl, chief pundit for Energy and
Capital, “this figure is likely low-balling the true amount of potential barrels in the play”.
Crunching Numbers for Gulfport’s Wagner 1-28H (Harrison County)
In 2013 Gulfport Energy hit what was at that times being praised as the most prolific
Utica completion to date. Their Wagner 1-28H in Harrison County was labeled by industry
pundits as the “alpha dog” of the entire play , with production exceeding that even of
CHK’s Buell well. The fact that both are in Harrison County speaks volumes as to the geology
there. As per their recent earnings call to stockholders, “the Wagner 1-28H was recently
brought online from its resting period and tested at a gross peak rate of 17.1 MMCF per day of
natural gas and 432 barrels of condensate per day. Based upon composition analysis, the gas
being produced is 1,214 BTU rich gas. Assuming full ethane recovery, the composition is
expected to produce an additional 110 bbls of NGL’s per MMCF of natural gas and result in a
natural gas shrink of 18%”.
Translation? Let’s give it a try. First, the reference to the BTU being high (at 1,214) and being
described as being “rich” are indicators that the production is liquid rich. Second, the reference
to a “natural gas shrink” means that, through processing, they can convert much of the dry gas
into LNG’s but at an 18% conversion loss. The amount of production reported as being gas
(17.1MMCF) will be converted at an 82% rate vs. normal conversion into liquids. The trade for
losing 18% of the gas production (a net 3.078 MMCF loss) is a gain of 110 bbls liquids for every
MMCF sacrificed. In numerical terms, the 3.078 MMCF lost is valued at about $3/MCF for a
total of $9.234 sacrificed daily. The reward is 110 bbls liquid production from every million
cubic feet of that 17.1 MMCF of gas, a net of 181 barrels. Consequently, gas production (17.1
MMCF) x value per bbl of liquid production ($110) = 1881 barrels of liquids (valued at about $35
per barrel), a trade resulting in over $65,000 in additional net income daily.
We must now attempt to value the percentage of production which is dry but still of value.
Using a conversion factor of 6000 CF/boe, we can do just that. Remember, the gas production
must first be discounted by 18% due to the loss converting some of it to LNG. Total gas
production (17.1 MMCF) less 18%, is now 14.022 MMCF. Divide by 6000 as per the formula,
and you have 14,022,000/6000 for a total of 2337 boe.
Add the production reported as being “condensate” which is 432 bbls/d to the LNG production
(post shrinkage) which is 1881 bbls/d to the 2337 bbls/d assigned to what had previously been
described as “natural gas” and you are looking at total production of 4650 bbls of oil equivalent
per day. A rough value of the production would be about $100,000 per day, based upon its
comparison to an analysis made by West Virginia Professor Tim Carr in relation to Gulfport’s
Stutzman well in Belmont County (4060 boe with similar BTU’s and liquid content). At that rate,
payout to the driller occurs in only 70 days. Remember, these wells will decline steadily over
time, so the $100,000 per day figure is not perpetual, but it is still impressive to recoup a $7M
investment in such a short time period. Gulfport is using longer laterals and more fracking
stages than competitors, incurring an additional half million dollars or so per well.
Gulfort’s Shugart 2-1H Well (Belmont County)
If you think Gulfport is proud of their Wagner well, they must be positively giddy about their
most recent completion. Anything close to what was reported by Equities.com on 10/9/12
would almost certainly be the best well drilled in the continental US this calendar year, and
perhaps one of the best ever, period. Their Shugart 1-1H well in Belmont County reportedly
tested at a peak rate of 20 MMCF per day of natural gas, 144 bbls of condensate per day, and
2002 bbls of LNG per day. Assuming full ethane recovery and a natural gas shrink of 17%, net
production was calculated at an incredible 4,913 BOE daily. Even more mind blowing was their
11/27/12 announcement, that their new Shugart 1-12H Well had an initial production rate of
7,482 boe daily, a figure unheard of in the industry!! Keep an eye on this one for sure. Gulfport plans to drill 50 new wells in Ohio during 2013.
That news was followed by a January 23 announcement regarding their first 2013 completions.
They seemed proud, rightfully so, to announce the fourth biggest producer thus far their
Stutzman well in Somerset Twp, Belmont County, which reportedly was producing 4060 bbls of
oil equivalent, including 21 Mmcf of natural gas and 945 bbls per day liquids (presumably
condensate). Their Clay well in Freeport Twp, Harrison County was impressive in its own right,
coming in at 2,226 boe daily to rank eighth thus far. Gulfport is dominating the production
numbers and it is no surprise that they have plans to drill 50 new Utica wells in Ohio during
2013.
Anyone who has been keeping up with this play knows that competitors, including Antero and Rice Energy have completed wells with production exceeding that of the Gulfport completions mentioned here. However, they were reportedly almost exclusively dry gas, although high quality with a BTU content of just over 1050. Production has been described as being “pipeline quality”.
Almost all my blogs are original in nature (unless otherwise cited) and have reliable bibliographies to accompany each