SunTrust: More certain of Utica economics after recent trip

SunTrust Robinson Humphrey Inc. – the full-service corporate and investment banking arm of SunTrust Bank Inc. – reported Jan. 25 that, after spending four days in the Utica shale play, its confidence in much of the play has increased, based on continued high initial production rates, limited expected depletion, improved spacing, and declining wells costs. To SunTrust, the companies appearing best-positioned are Gulfport Energy (GPOR, $41.71, Buy), PDC Energy (PDCE, $36.97, Buy), Magnum Hunter (MHR, $4.17, Buy), and Rex Energy (REXX, $13.70, Buy).

SunTrust’s report said that, when trying to define the best parts of the Utica, it determined that the two keys are depletion rates and commodity mix. The ultimate well, the company said, would be nearly all oil with a very gradual production decline. SunTrust stated that its due diligence in the Utica confirmed that the play has higher liquids going from east to west, and that the depletion rate seemed to be better in the east. Thus, it said, the best wells appeared likely to be on the Guernsey/Belmont counties border and the Noble/Monroe counties border.

SunTrust noted that, according to numerous operators and other Utica experts, although depletion may be initially high for a couple of weeks, the decline stabilizes soon after. Therefore, SunTrust said that it will continue to estimate a first-year decline of approximately 63%.

The report also stated that estimated ultimate recovery (EUR) estimates are increasing. SunTrust said that recent Netherland Sewell EUR estimates are approximately 1.2 MMBOE for a wet gas type well and approximately 1.7 MMBOE for a dry gas type well. However, SunTrust’s EUR estimates remain at approximately 3 MMBOE, with the primary difference being its assumed first-year depletion, whereby SunTrust calculates a decline rate of 63% versus the Street at ~80%. As a result of SunTrust’s lower estimate of depletion, it derives an IRR of 224%, which is much higher than the Street forecast of ~50% – although, the report said, there is very limited historical Utica well data, so time would determine which estimate was closer.

SunTrust also said that tighter spacing was leading to increased Utica drilling locations, noting that the Ohio Department of Natural Resources Technical Advisory Committee has approved 225-foot horizontal spacing for one operator. As such, companies are beginning to test various spacing lengths. Although early, down to 40-acre spacing is possible, in SunTrust’s view, which could quadruple the number of estimated drilling sites that most companies in the play are currently expecting.

SunTrust also said it believes that Utica well costs are beginning to decline. Although the average Utica well cost remains over $10 million, SunTrust noted that there is evidence that costs could fall soon. Operators highlighted pad drilling, improved drilling and completion times, and lower supply costs as a few reasons why costs have begun to drop. SunTrust estimates that the average Utica well with a 6,000-foot lateral will cost around $8.5 million this year.

The report said that Utica infrastructure is still a bottleneck, but progress is noticeable. Additionally, while regional processing and pipelines continue to be a problem, infrastructure construction has increased considerably. Markwest Energy Partners (MWE, $53.66, NR) highlighted its numerous projects at SunTrust’s recent Utica conference.

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