Thought of the Day:

Much Work Remains to Be Done to Define Utica Value

The recent eye-popping initial production results from the Utica Shale demand attention from E&P investors. As is typically the case, however, what will bear watching more closely from the Utica is the extended production data from these wells spanning over 30-, 90-, and 120-day or longer periods. While the “shake and bake” method of shutting in wells in order to allow frac water to dissipate into what appears to be a shale with much lower water saturation than other shales seems to work well to extremely well, how these wells will decline is not well known. Throughout the decades, operators have generally witnessed many other promising reservoirs from the Frontier to the Austin Chalk, even to the now-prolific Eagle Ford, that had high initial production rates but did not necessarily make successful wells. In the table and text below we attempt to bracket expectations for Utica Shale wells in terms of estimated ultimate recoverable reserves (EURs) and financial returns for a variety of production scenarios.

Presently, hydrocarbon content does not appear to be a major concern in the Utica. The presence and maintenance of the energy in the formation will continue to force hydrocarbons up-hole, particularly the higher-value oil, condensate, and natural gas liquids that potentially make these wells so valuable. Skepticism will continue to linger, however, until sufficient decline curve data is made available across a wide aerial extent of the play. Of interest in particular is how this energy affects the shape of the hyperbolic portion of the decline curve.

Our typical Utica Shale decline curve is defined by an initial production rate of 750 boepd with a Di of 80% and a 2.3 b-factor, translating to EURs of 1.1 Mmboe. In the context of recent wells that IP'd at rates of 3,500 boepd to 4,500 boepd, we estimate the well defined by the type curve below will produce a negative ($2.2MM) PV-10 value assuming a $10MM well cost, an even ratio of natural gas to NGLs production composition, and commodity prices of $3.50/mcf and $38/bbl. If an operator were to realize drilling and completion efficiencies typical of the evolution of best practices in these types of shale plays, such that the well cost declined to $6.5MM, we estimate that the PV-10 would improve to a positive $1.1MM with a respectable 17.3% IRR for a well with these same physical characteristics.

[Decline Curve]

If we assign a more likely decline curve scenario to our 750 boepd scenario with a D i of 85% and a b-factor of 1.8, the EURs decline to 650 Mboepd and the estimated PV-10 value declines to ($3.0MM).

Similarly, if we change the proportion of production to 50% natural gas, sold for $3.50/mcf, and 50% NGLs, sold for $38/boe, our estimated PV-10 declines to ($3.0MM). In the nature of a full presentation of the Utica potential consistent with replication of the 3,000 boepd or larger IPs recently posted, we estimate that a Utica well with a 3,000 boepd IP with an 85% D i and a b-factor of 1.8, would produce EURs of 2.6MMboe. At a production mix of 25% crude oil, 50% natural gas, and 25% NGLs that sold representatively for $81/bbl, $3.50/mcf, and $38/bbl with a $10/boe operating cost and a 7.4% production tax, we estimate a well exhibiting the physical profile noted above would be worth $6.7MM on a PV-10 basis, generating an IRR of 69.2% with a payback timeframe of 1.75 years.

With an eye toward potential land acquisition values, in the tables below we extrapolate out per acre valuation estimates based on the various PV-10 values generated in the above analyses.

[TABLES]

With theoretical acreage values ranging from $563/acre to more than $50,000/acre, ultimately depending on the productivity of the wells and the amount of acreage required to remain productive, the primary takeaway from our analysis is that much work remains to be done to define the productive bounds of the Utica. A secondary takeaway, which has likely already been experienced by some (but they probably don’t know it yet), is that given this large degree of potential variation across well values, there will be some substantial winners and some substantial losers.