Home > Stock Analysis

It's Too Soon To Play The Utica Shale

Posted: Apr 07, 2009 15:20 PM by Eric Fox

Tickers in this Article: EQT, RRC, TLM, FST

The Utica Shale is a relatively unknown North American shale play in Eastern Canada near Montreal that extends over the border into the Northeastern United States (New York and Pennsylvania). While this shale has potential, the lack of extensive development makes it difficult to determine just how much gas it has and whether it will be commercially viable.

Get Free Stock Analysis By Email

IN PICTURES: Top 8 Estate Planning Mistakes

Geology
The Utica Shale is an Upper Ordovician shale, deposited 440 million to 460 million years ago. It is located below the Marcellus Shale, which is a Middle Devonian formation. It is difficult to estimate the amount of original gas in place or recoverable reserves since the industry is still developing the area.

One advantage to the shale is that gas produced here gets a price premium to the NYMEX of approximately $1 per Mcf. Pipeline capacity is also currently adequate.

Canadian Area
Forest Oil (NYSE:FST) is one of the few exploration and production companies currently in the Utica Shale, where it has 269,200 acres under net lease, mostly in Canada. In 2008, Forest Oil completed three horizontal wells that tested three different zones in the play. The company sounded a little disappointed with the results, as the wells had initial production rates of 100 to 800 Mcf/d of natural gas.

Although these rates are far below wells in other shale plays, the area is so new that operators are still testing different technologies and techniques to maximize production, so it wouldn't be fair to write off this area just yet.

Talisman Energy (NYSE:TLM) is also drilling test wells in the Utica Shale in Canada. The well it completed in September 2008 had an initial production rate of 800 Mcf/d. The company plans two more wells in 2009 to test various sections of the play.

United States Area
Range Resources (NYSE:RRC) discussed the Utica Shale during its second-quarter conference call back in July 2008, when commodity prices were at or near their peak. The company said it has been studying the shale since 2004 because of its heavy involvement in the Marcellus Shale. At the time, the company planned "one or two wells" in the Utica in 2009, but in its most recent marketing presentation, the area was under "evaluation".

Equitable Resources (NYSE:EQT) is also active in the shale. During Q1 2008, the company said it planned to use an existing well that was drilled to the Marcellus Shale, deepen it down to the Utica Shale and hopefully produce from both formations. A second vertical well was also planned for the Utica. During the Q3 conference call, management said it was planning a larger hydraulic fracturing operation and had "a little bit of a hold on the Utica at this point".

Three Micro Caps Have Interests
Investors who like micro-cap stocks can look at three Canadian companies that have interests in the area - Junex (CDNX:C.JNX), Gastem (CDNX:C.GMR), Questerre Energy (TSX:C.QEC) and Altai Resources (CDNX:C.ATI). These four are early-stage and speculative companies, so do your homework before buying them.

It's Too Early To Make A Call
The Utica Shale has some companies excited, but it's too early to make a call on this North American shale play. Initial wells have been a little disappointing, and the fall in natural gas prices has caused companies to shift budgets to areas with more definitive results.

To learn more about investing in companies such as these, be sure to check out our Oil And Gas Industry Primer.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS