The Utica Shale is an emerging unconventional oil and natural gas play that largely lies under eastern Ohio as well as parts of Pennsylvania, West Virginia and New York. Chesapeake Energy (NYSE:CHK) was one of the first companies to commence operations in the Utica shale and is currently the largest and most active leaseholder in the region. While the play is still in its early stages and is much small compared to shales such as the Marcellus and Bakken, it looks promising since it is rich in wet gas as well as oil and also happens to be the only land-based oil play east of the Mississippi river giving it proximity to refineries on the East Coast.  In this note, we take a look at Chesapeake’s operations in the Utica shale play and where they could be headed.
Production Has Been Slow, Should Rise As Processing Infrastructure Improves
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Although the Utica shale holds dry natural gas, wet gas as well as oil, Chesapeake’s focus in the play is largely geared towards wet gases and oil since they are more lucrative. Chesapeake is the largest leaseholder in the Utica shale play with close to 1 million acres. Most of the company’s holdings are in Ohio, which contains a greater portion of wet and liquids rich assets. The company has drilled close to 350 wells in the Utica shale of which around 106 wells are currently producing hydrocarbons while around 93 wells are waiting for pipeline connections. As of Q2 2013, Chesapeake was producing just about 85 million cubic feet of gas equivalent (MMcfe) of hydrocarbons per day from the Utica, contributing less than 2.5% to Chesapeake’s total daily production (assuming average daily production of 3,990 MMcfe for this year). 
Much of the sluggishness in production can be attributed to the fact that infrastructure in the play is still in its infancy. Since a large part of the region, particularly in Ohio, is still relatively new to oil and gas exploration, there is still a lot of work to be done particularly in terms of processing infrastructure as well as transportation infrastructure such as compression facilities, pipelines and railroads. Processing plants are used to separate oil and natural gas liquids (butane, propane and ethane) from natural gas before sending them to the pipelines. However, there has been some progress in recent months. Chesapeake has mentioned that 200 MMcfe in processing capacity recently came online and also indicated that an additional 400 MMcfe in processing capacity is expected to be commissioned over the next few quarters.  The firm expects the improved processing capacity to allow it to ramp up production from the play to close to 330 MMcfe (close to 8% of overall daily production) by the end of the year.
Earlier this year, Chesapeake put up around 94,000 net acres (10% of its Utica holdings) for sale. However, this acreage has very few wells and a potential sale is unlikely to have an impact on Chesapeake’s production growth from the Utica. 
Higher Well Costs But Chesapeake Could Be Better Poised Than The Competition
Chesapeake is the most active driller in the Utica play, having drilled close to 70% of all the wells in the region. The company currently operates around 9 rigs here and has allocated about 11% of its drilling and completion budget for FY2013 to the play. Well construction costs in the Utica shale play are known to be relatively high when compared to other plays such as the Marcellus, but we believe that Chesapeake is likely to have an advantage over its competitors thanks to its sophisticated drilling technologies and improving efficiencies. For instance, the firm has been able to reduce drilling spud-to-spud cycle times from about 26 days a year ago to around 18 days presently. Drilling costs have also been falling as the firm has been deploying methods such as pad-based drilling. During the second quarter, the company mentioned that it was able to complete some wells in the Utica shale for as low as $5.9 million each.
Trefis has a $24 price estimate for Chesapeake Energy, which is about 7% below the current market price.Notes: