Chesapeake Energy Corporation (CHK), Markwest Energy Partners LP (MWE): Don’t Count out the Utica Shale Just Yet

Page 1 of 2

On May 16, the Ohio Department of Natural Resources finally published 2012 production data for the Utica Shale – a rock formation located thousands of feet below the Marcellus that spans Ohio, New York, Pennsylvania, Virginia, and West Virginia, though most activity to date has been concentrated in Ohio.

The long-awaited report shows that the play’s 87 producing wells amounted to an output of roughly 1750 barrels of oil per day and about 35 million cubic feet of gas per day. While that’s nothing to scoff at, the data was disappointing for investors hoping that the Utica would be the next big oil play, potentially even rivaling the prolific Eagle Ford play of Texas.

However, despite the less than stellar data released by Ohio officials, there is still reason to be optimistic about production growth in the Utica this year. Let’s take a closer look.

Chesapeake Energy Corporation (NYSE:CHK)

Infrastructure constraints
The main reason the Ohio Utica’s production results weren’t as good as they could have been is that many Utica operators held back on bringing new wells on line last year, due largely to the lack of gathering, processing and fractionation capacity.

Chesapeake Energy Corporation (NYSE:CHK), which was the play’s most active driller last year and is currently operating 14 rigs there, cited the lack of processing infrastructure as the biggest reason for production growth remaining below its potential. “Processing is really the holdup,” said Chief Operating Officer Steven Dixon in the company’s first-quarter operational and financial update.

Good news ahead
However, infrastructure constraints are expected to ease substantially, which should provide a healthy runway for Utica producers to accelerate drilling. Indeed, Chesapeake Energy Corporation (NYSE:CHK) expects to more than quadruple its average first-quarter natural gas volume this year, as new pipelines and processing plants are brought on line.

Analysts expect some $2 billion worth of new projects to be revealed, in addition to the $2 billion of projects that have already been announced. Major projects that have either been proposed or are under way include a natural gas liquids processing plant by affiliates of NiSource Inc. (NYSE:NI) and Hilcorp Energy; a gathering and processing plant by M3 Midstream LLC, Access Midstream Partners LP (NYSE:ACMP), and EV Energy Partners, L.P. (NASDAQ:EVEP) ; and a proposed pipeline from Ohio to Detroit and Canada, to be built by DTE Energy Co (NYSE:DTE), Spectra Energy Corp. (NYSE:SE) and Enbridge Inc (USA) (NYSE:ENB).

1 midstream company to watch
But the company that has perhaps invested most aggressively in Utica infrastructure is Markwest Energy Partners LP (NYSE:MWE).

Page 1 of 2