APPALACHIA REGIONAL UPDATE

Energy Advisors Group has released a Special Supplement to its recent Appalachia Perspectives Report as a continuation of our Market Monitor Series and thought leadership efforts. This 25-page Special Supplement shines a bright light on what's driving the success now underway in the re-emerging Ohio Utica play.

Observations & Takeaways- The Re-Emergence of the Ohio Utica as a Premier Oil/Liquids Play

• The Ohio Utica has been targeted since at least 2008 when Equitable Resources put an exploration team in place, shot 3D in 2009 and drilled its first well on a 200,000-acre position
• Chesapeake began leasing in 2010 and by 2011 had 1,250,000 acres and announced a “Major Liquids Discovery” in the “Ohio Utica Shale” and was running 5 rigs
• Fast forward to the present day and EOG’s announcement in November 2022 that it had acquired 395,000 acres has sparked renewed industry and investor interest
• EOG’s commercial strategy leverages and includes:
• A significant acreage/mineral footprint trending SW to NE concentrated in the Volatile Oil Window
• Partnering with DT Midstream for a greenfield gas gathering trunkline for takeaway to premium markets North
• Ability to precision drill 3-mile laterals and bring online a 4-well pad that is outperforming the type curve
• High-quality inventory rated as “double premium” based on hurdles of $40 oil, $16 NGLs and $2.50 gas which means an after-tax return of 60%+ 
• Continuing the optimization process currently downspacing wells from 1000’ spacing to 800’ spacing
• Private and P/E backed Ascent Resources and Encino Energy are on trend next door to EOG and combined operate over 60,000 bbl/d of Ohio’s total of nearly 77,000 bbl/d 
• Ohio’s oil production is beginning to rise again from ~40,000 bbl/d in mid-2021 to nearly 80,000 bbl/d while its gas production has remained relatively flat since 2020 hovering around 6 Bcf/d
• With EOG, Ascent, Encino all turning their focus to the liquid/oil phases of the Utica it is likely that new oil production records will soon be broken for Ohio

Energy Advisors Group's Quick Look at some Industry Questions -

Question #1:

• How does the gas pipeline takeaway capacity affect the relative attractiveness of the Utica as a productive reservoir? 

Answer:

• The Utica midstream story is very different than the Marcellus as much of the Utica infrastructure was built out 10 years ago and overbuilt. So there are plenty of options for gas takeaway.
• Generally operators have good midstream relationships all the way down the line including interstate pipelines and plant tail gates.
• As part of its commercial strategy, when EOG entered the play it immediately partnered with DT Midstream in Noble County to build a gathering trunkline to take gas, process it and then sell to premium markets North.

Question #2:

• Do Utica wells generate financial returns that are competitive with other basins?

Answer:

• Yes, EOG states:
• F&D costs are less than $5 per barrel.
• EOG states its first 4 wells earned "Premium" and "Double Premium" returns assuming 3-mile laterals and 2-3 MMboe EUR with 60-70% liquids. By definition:
• "Double Premium" means 60% after tax return based on $40 oil, $16 NGL and $2.50 gas.
• "Premium" is defined as 30% after tax return on same price deck.
• They do consider their acreage as Tier 1 with some Tier 2.
• Delineation is also underway from 1,000' spacing to 800' spacing which would increase the value of acreage holdings.
• EOG's 4-well Timberwolf pad in Carroll County had average well IP30's of 2,150 boepd (55% oil, 30% NGLs, 20% gas) and is outperforming its 2022 Type Curve.
• Also Ascent shows their wells look to have payout in about a year at $3.50 gas – that is better than the Haynesville core which is closer to 18 months.

Question #3:

• Should we expect further consolidation and mergers of operators in the Utica?

Answer:

• Given the top two players – Ascent and Encino are private P/E backed companies, you never know. Both of these entered in a big way back in 2018 so they are 5 years or so into their investment horizon.  
• Ascent's big entry was a $1.5 billion deal in June 2018 via the purchase from four sellers (Hess, CNX, Utica Minerals Development and an undisclosed seller) with sponsorship from First Reserve and The Energy and Minerals Group.
• Encino's big entry was a $1.9 billion buy of Chesapeake's Ohio Utica assets in July 2018 with sponsorship from Canada Pension Plan Investment Board (CPPIB).
• The current M&A market favors public players and the trend for private equity is to sell into this market.
• Ohio's Utica offers public companies a rare opportunity to build Tier 1 inventory and have commodity optionality. 
• Gulfport would be a public company that we would not be surprised to try to expand its Utica in this environment.
• We already know that "market talk" is that Chesapeake has approached Southwestern for a buyout – though this would likely be driven by Southwestern Marcellus gas portfolio. On a standalone basis, an argument could be made that Southwestern's Ohio Utica acreage might be more valuable in another player's hands.  
• Another quick observation – Hilcorp has a very small presence in the Utica and it is public knowledge that they are looking to grow their production base from about 350,000 bbl/d to 500,000 bbl/d so the Ohio Utica might be a target area for them.
• In terms of blocking and tackling A&D, all the top players continue to do smaller style bolt-ons to increase their WI and/or purchase minerals in their fairway.
• If you look at the map, there are some smaller private players with nice contiguous acreage positions (including in the volatile oil phase) that might well test the market and likely generate multiple nice offers.  

Question #4:

• Is there ample running room in the Volatile Oil/Wet Gas windows and who are the major players?

Answer:

• Yes
• The Utica has had starts and stops in 2010-12, 2016-2018 and now looks to be setup for a third run – this time looks to be sustainable given higher oil and NGL pricing. There is plenty of Tier 1 acreage yet to be developed.
• The Volatile Oil/Wet Gas areas were not heavily exploited as most players at the time were chasing the gas window.
• The Major payers are Encino, Ascent and now EOG. 
• Gulfport and Southwestern have smaller footprints but enough acreage to pursue meaningful development in these phases.
• There are also smaller but nice contiguous positions by several private players.

Energy Advisors is working hard to expand our thought leadership and look forward to providing additional market insight for our clients through regional perspectives, M&A analysis and market monitor. 

Our firm has been serving the needs of buyers, sellers and capital providers for over thirty-five years.

TO LEARN MORE:

Energy Advisors Group

Brian Lidsky

Director

Phone: 713-600-0138

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