Utica is the hottest natural gas play in the U.S., not just because it's new,
but because its potential is not fully known, according to Neal Dingmann, managing director of investment bank SunTrust
Robinson Humphrey. While lagging well results have kept the Utica a hidden
gem, several companies are poised to reveal impressive results. Dingmann discusses undervalued companies capitalizing on
the play in this exclusive interview with The
Report: Neal, Malaysian crown corporation PETRONAS recently
reached a merger and acquisition (M&A) deal to buy Canada's Progress Energy Resources Corp.
(PRQ:TSX) for CA$5.5
billion ($5.5B). Progress, primarily a natural gas play, received a 77%
premium to the company's closing price the day before the deal. What is the
broader message investors should take away from that takeover?
Neal Dingmann: The North
American M&A market continues to be very strong.
While there has been volatility in commodity prices and energy stocks, one
thing that has helped is that the M&A
environment has remained quite stable. In fact, it has been on the upswing.
This takeover is another sign of that. The long-term implications are pretty
clear. Despite the volatility in gas prices, there is long-term confidence in
natural gas prices and other large companies that should cause deal values to
remain at sizeable premiums.
Does it indicate that investors are willing to pay a premium for gas assets
or just these gas assets?
These assets are considered above average, but, in general, investors are
willing to pay more for many gas assets. It's much like when Exxon Mobil Corp. (XOM:NYSE) bought XTO Energy Inc. not
terribly long ago. At that time, Exxon was also willing to pay a premium
despite the volatility and weakness in gas prices.
more natural gas takeovers on the way?
believe so. There may not be as many dry gas takeovers in North America
initially. There have clearly been a lot of liquids-related deals. I still
expect there to be a number of takeovers and buyouts. The most tempting
M&A targets will have diversified gas and liquid assets.
recently told Bloomberg that
you're "cautious" on natural gas and "quite bullish" on
oil. Please elaborate on your positions.
environment has remained quite stable. In fact, it has been on the upswing."
cautious about the near- to medium-term forecast for natural gas. Most of
these newer oil and gas plays, whether it's the newer Utica play, or a more
established play like the Bakken, have a sizeable
amount of associated gas. My fear is that even if the dry gas plays, such as
the Haynesville or the Barnett, continue to see production fall, that will be
more than offset by the increase of the associated gas from some of these
newer liquid or oil plays. I don't necessarily think that's going to be the
case, on a long-term basis, but it still does have me quite cautious in the
have recently cut their oil forecasts. But one thing that continues to make
oil different from any other sector is oil's high depletion rate. And many
newer oil plays have higher depletion rates than past averages. My bullish
sentiment is largely based on that along with likely continued incremental
TER: Chesapeake Energy Corp. (CHK:NYSE) is facing up to a $20B shortfall
in cash flow. Corporate governance issues ultimately resulted in Chief
Executive Aubrey McClendon being replaced as chairman by Archie Dunham,
former chairman of ConocoPhillips (COP:NYSE).
Chesapeake has sold some assets and is looking to sell even more. Where
others see a troubled company, you see value. In fact, you have a Buy rating
on Chesapeake. Tell our readers why this story could get better.
You've brought up a lot of good points. I try to boil exploration and
production (E&P) companies down to asset value, whether it's Chesapeake
or a smaller, simpler story. My analysis still shows that, after all the
assets that Chesapeake is scheduled to sell, it still has four to five large
liquid plays where it's either the No. 1 or No. 2 industry participant. And
this is without attributing value for its many gas plays where it's in first
or second place. The M&A market remains very hot and its asset value is
clearly much more than where the stock price is today, even if its $13B debt
is backed off.
Chesapeake recently put 337,000 acres in the Utica Shale up for sale. What do
you expect that to fetch and who are some likely buyers?
Utica is the hottest play in the U.S., not just because it's new, but because
of its potential. I've heard it could have some of the best economics of any
area in the U.S. Unfortunately for Chesapeake, some of the portion it put up
for sale is on the fringe. It is also keeping a core holding for itself.
Therefore, it won't fetch the $10,000+ valuation per acre that some of the
core acres could get, but could still receive over $2,500 per acre.
"The Utica is the hottest play in the U.S. A
lot of the players there are potential targets for other large
will still be a relatively large number of companies looking at it, including
some of the big players that are already in the play, such as Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE), as
well as majors like Exxon that are looking for big growth packages. It's very
difficult, especially onshore in the U.S., to find any sort of large acreage
blocks like this. Besides, a lot of the players that are already in the Utica
are potential targets for other large E&Ps that would like a presence.
Utica has been flying under the radar of most oil and gas investors. A June
25 SunTrust Robinson Humphrey report said that's going to change soon. Why is
this play on the rise?
was under the radar prior to early well results being released by Chesapeake
late last year. Prior to that, there was just a dearth of results. A lot of
that has to do with having to rest or shut-in these wells once they're
completed. Companies that have shut-in wells have to let them rest before
they start releasing results. Many wells are on the verge of production. In
fact, I've heard Chesapeake alone could have as many as 20 wells that could
be released by the end of July. Once a number of well results are released by
Chesapeake, Gulfport Energy Corp. (GPOR:NASDAQ), Rex Energy Corp. (REXX:NASDAQ) and
Anadarko Petroleum Corp.
(APC:NYSE) among others, the play is likely to start
attracting investor interest again.
What are some of the more prospective counties that investors can zero in on?
That's one thing about the Utica—nobody knows for sure where the best
prospective or core counties would be. Based on channel checks and
conversations that I've had I would say eastern Ohio—Carroll, Harrison
and Guernsey counties—even as far south as Monroe and Noble counties.
But nothing has been clearly established.
you expect to see other wells like Chesapeake's Buell 8H well, which is
producing 9.5 million cubic feet per day (MMcf/d)
of natural gas and 1,400 barrels of oil per day (bbl/d)
even after several months of production?
"Commodity prices should be strong enough to
support higher prices in a number of E&P stocks."
Buell well was not just a great well for the Utica, but it's essentially one
of the best wells I've seen in the U.S. period. Even though it was that good,
there is a chance that there are others at least that good and maybe even
better. There are companies, such as Gulfport, that have wells with more frack stages. There was even speculation a couple weeks
ago that a private producer in Monroe County produced a well that was doing
over 3,000 boe/d and over 1,900 barrels a day (bbl/d) of condensate, which would make it a better well
than the Buell.
We've seen the emergence of different shale plays over the last few years,
but it seems like new shale plays continue to trump the others. Today it's
the Utica. Is there more to come?
There will always be new discoveries. A lot of that has to do with the
continuation of advanced technology. We are talking about being able to drill
horizontally underneath the ground up to several miles. Technology continues
to advance the chances that there will be another play. Will there be plays
that surpass something as good as the Bakken, the
Permian and the Utica? That's tough to say. Do I think we'll find other large
shale plays? I do.
What are some of the companies operating in the Utica that could ride
positive well results and boost investor sentiment?
Chesapeake is still No. 1 despite all the recent noise that the company has
had. If the Utica does work out as I expect, I can't imagine that the
100-pound gorilla wouldn't start to gain some traction. Others that are a bit
more leveraged are Gulfport Energy, REX and PDC Energy
All three of those have very solid acreage positions in the play. Two large
ones would be Anadarko and Devon Energy Corp. (DVN:NYSE).
Where is Rex's shale acreage?
Nearly all of its position is in Carroll County, which is very positive. It's
one of the best counties. Its position is also in one continuous block versus
being scattered around, which is important.
Have condensates been discovered in any of the wells?
There's been a fair amount of condensate in that area. We're clearly going to
learn more over the next three to five months. I would predict that the area
will probably contain around one-third oil, one-third liquids and one-third
What's your outlook for Gulfport?
baseline oil production in the Gulf Coast coupled with its upside in the
Utica could make for a very exciting year. But a lot of investors haven't
factored its very significant oil sands position into their valuations. It
owns 25% of Grizzly Energy, which has a very large position at Fort McMurray,
Alberta. First production there is supposed to be around the second quarter
next year (Q2/13), which could be very positive for Gulfport's stock. My
target for Gulfport is $45. It's still only trading around $20.
What about Rex?
have a higher price target on Rex than the current share price, which is
driven from the massive production growth of around 90% sequentially this
year coupled with approximately 50% sequentially next year, all of which is
mostly in the liquids part of the Marcellus, though its new Utica play in
Ohio should also help.
I've got a higher price target on Chesapeake than the current share price
that is driven by incremental cash flows, mostly from the company's liquid
assets. The company clearly has even more upside if natural gas prices begin
to rally above $3/Mcf.
TER: Magnum Hunter Resources Corp. (MHR:NYSE.A) is another
play that's got some acreage in the Utica. When will it be drilling and how
soon could we get results?
Magnum has attractive acreage in Monroe County. The issue that I see with
Magnum in the near term is that it doesn't quite have the infrastructure
necessary to process and transport the commodities. There could be a well
drilled there in the coming months with a very brief test period on it, which
could get us some results. However, it will be very difficult to see an
actual flow rate for Magnum Hunter this year in the Utica because of the
What should oil and gas investors look for through the end of the year?
clearly had a volatile first half of the year. I don't think that level of
volatility will continue, but the markets could still remain quite choppy.
Both oil and gas could be a bit range bound through at least early next year.
Oil could be somewhere from $80–95/bbl. Natural gas has likely already
experienced the lowest levels it could see in some time with it likely
trading somewhere around $2.50–3.50/Mcf well
into next year. However, these commodity prices should be strong enough to
support higher prices in a number of E&P stocks versus today's current
Thank you, Neal.
Neal Dingmann covered 30+
companies in the exploration and production and oilfield services sectors as
an analyst at Wunderlich Securities. He has held
similar positions at Dahlman Rose & Co.,
Pritchard Capital Partners, RBC Capital Markets and Banc of America
Securities. He has been recognized by The Wall
Street Journal and Institutional
Investor. He holds a Master
of Business Administration from the University of Minnesota and a Bachelor of
Arts in business from the University of Arkansas.
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1) Brian Sylvester of The
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