Move over Marcellus, there’s a new player in town.
A large contiguous rock formation thousands of feet below the Marcellus, the Utica shale underlies eight northeastern states and parts of Ontario and Quebec. It so large in fact, it spans 170,000 square miles, making it one of the largest shale formations in America (and nearly twice the size of the Marcellus).
The US Geological Survey (USGS) estimated that this formation may contain 38 trillion cubic feet of technically recoverable natural gas, 940 million barrels of unconventional oil and 208 million barrels of unconventional natural gas liquids.
In a word, it’s utterly massive.
But despite its size, drillers have largely ignored the formation. In 2011, the Utica had a mere nine producing wells. In 2012, that number grew to only 87.
Today, however, drilling is heating up with 119 wells already in production, and an additional 243 expected by the end of the year.
In fact, predictions are for over 1,000 Utica wells to be producing by 2015 ~ an astounding 11,000% jump from 2011.
Currently, the majority of the drilling frenzy in this shale has been concentrated in the Buckeye State: Ohio.
Ohio has approximately 50,000 active conventional wells.
But what’s really interesting is that the 87 Utica wells in 2012 accounted for a staggering 12% of all oil and 16% of all gas produced in the state.
Too Good To Pass Up
Now, there are some talking heads on Wall Street that think the Utica is a waste of investment dollars.
That’s because the formation contains complex geology and is deeper than other shale cousins, making it a relatively more expensive endeavor.
Even in Ohio where the Utica is easiest to reach, drillers still need to get through 5,000 feet or more of dense rock to hit pay dirt.
Of course, high drilling costs and complexities are further exasperated by the fact that natural gas prices are down.
So from that perspective, it’s not hard to see why some would shun the Utica.
But there is a reason the number of wells here continues to climb…
And that’s because companies are lured by an abundant fuel source that is too profitable to pass up: wet gas.
Wet gas, or natural gas liquids (NGLs) as it’s also called, has quickly become one of the most economic fuels to extract.
You see, dry gas — which commands Henry Hub spot price — is essentially methane.
Wet gas, on the other hand, comprises of a number of different gas compounds, including ethane, butane, and propane – all of which can be separated and sold separately at higher prices.
For companies like Chesapeake Energy Corp. (NYSE:CHK), the lucrative NGLs being extracted is able to offset the higher costs required to drill into the Utica.
According to Chesapeake, a typical wet gas well can pull in two to three times more revenue per day than a dry gas well.
Those kinds of numbers bode well for two top stocks that are confident that the Utica has what it takes to become a premier shale play.
Top Utica Stocks to Buy Now:
Magnum Hunter Resources Corp. (NYSE:MHR) is both a driller and a midstream company. It recently sold its Eagle Ford shale assets to focus more on the Appalachian basin of Marcellus and Utica.
MHR just completed drilling of its very first Utica well in Washington County, OH and is now undertaking fracturing stimulation. Production testing is expected to commence in late September 2013.
Its Eureka Hunter pipeline project is also in full swing in Monroe County, OH.
With Eureka’s West Virginia facilities already in operation to service its Marcellus wells, the completion of the Monroe County expansion will provide strong exposure to MHR’s future Utica developments.
Another company on the move is midstream player Crosstex Energy (NASDAQ:XTXI).
Because the Utica has substantially fewer development projects compared to other shales, there’s also less midstream infrastructure currently in-place to bring supplies to market.
Crosstex is looking to fill that void.
Last week, the company announced that it was reactivating its Black Run rail terminal that will be used to transport shale condensate from the Utica to refineries and other consumers.
Black Run can load 24,000 barrels of oil a day and is adjacent to the Company’s fuel-gathering pipeline.
As well, earlier this year Crosstex made significant investments in three natural gas compressor stations in eastern Ohio with the formation of E2 Energy Services.
Upon completion, total capacity for the three facilities will reach 300 million cubic feet per day of compression and 12,000 barrels per day of condensate stabilization.
This is just a small preview of what’s to become of the Utica shale.
Investors are going to be hearing a lot more from this quiet giant very soon.