Utica Shale Play Is Crucial for Chesapeake: Opinion

NEW YORK (Trefis) -- The dramatic fall in natural gas prices in the U.S. has left Chesapeake Energy(CHK) in a difficult financial position.

It's been in a hurry to sell off assets to meet its funding shortfall, which is estimated to be at $22 billion. Chesapeake is considering selling off many fully or partially owned midstream businesses alongside some gas and oil fields.

It recently completed a $2 billion deal to give up its 46% stake in its affiliate Chesapeake Midstream Partners(CHKM) .

Chesapeake's core business was natural gas exploration, but management is considerably shifting focus to a balanced mix of dry gas and liquids production to support sustainability of cash flows in future.

We have a Trefis price estimate of $19 for Chesapeake, which is in line with the current market price.

See our complete analysis for Chesapeake at Trefis.

Utica Shale: Tremendous Potential

The move toward more natural gas liquids and oil is reasonable as oil is an indispensable commodity, at least in the near future. Although natural gas is also an indispensable commodity, it has been vulnerable to price slumps.

Hence, there is a gold rush for reserves that are likely to hold more oil than gas or NGL. In January, 2012, the French company Total(TOT) agreed to partner with Chesapeake in the Utica Shale reserve joint venture with a $2.3 billion investment.

Chesapeake spent heavily on Eagle Ford Shale earlier and claimed that 55% of total production in the first quarter of 2012 was oil, which bodes well for its strategies.

Another promising reserve is Utica Shale, in which Chesapeake holds the largest stake. It has drilled 59 wells in the play of which nine rigs are currently producing.

In its recently published investor presentation, Chesapeake reported that eight of those nine were wet gas windows with nearly one-third being oil output, which is relatively high compared to conventional wells.

Wet gases typically include ethane, propane and butane. Chesapeake has budgeted nearly 39% (nearly $3 billion) for Eagle Ford and 8% (nearly $600 million) for Utica Shale of its 2013 estimated total capital spending.