Utica Shale Could Spur M&A and Ohio Steel

by Justin Dove

Utica Shale Could Spur M&A and Ohio Steel

by Justin Dove, Investment U Research

Friday, September 30, 2011

The Ohio Oil and Gas Energy Education Program (OOGEEP) released a very bullish projection this month on the economic impact of Utica shale activity in the region.

The report predicted that Utica shale production could generate 204,500 jobs in just four years and infuse billions into the regional economy.

It follows claims by Chesapeake Energy (NYSE: CHK) that the Utica is "analogous" to the Eagle Ford. It also claimed that its holdings in the region could generate up to $20 billion for shareholders - greater than its entire current market cap.

"The play reminded us of the Eagle Ford shale, which is distinctive because it's a three-phase play of dry gas, wet gas and liquids," Chesapeake CEO Aubrey McClendon said.

David Fessler recently explained the importance of the liquids-rich shale plays right now, and eastern Ohio is certainly shaping up to fit that bill.

Utica Shale Gas Play

Utica Shale Is Attracting Big Players

Chesapeake Energy isn't the only company bullish on the prospects of the Utica. EV Energy Partners (Nasdaq: EVEP) Chairman and CEO John Walker feels the presence of more than just shale will attract petroleum companies and help bring business to oil refineries in the region owned by Marathon Petroleum Corp. (NYSE: MPC).

"We hope to drown the Marathon refineries in Ohio [with Utica oil]," Walker said.

Chesapeake, which holds the lion's share of acreage around Utica, is also said to be looking for a foreign partner to bring in for exportation and de-risking purposes.

  • In the past, Chesapeake Energy has worked on similar ventures with Statoil (NYSE: STO), BHP Billiton plc (NYSE: BBL) and CNOOC Ltd. (NYSE: CEO), among others.

  • Chevron (NYSE: CVX) recently acquired Atlas Energy and ExxonMobil (NYSE: XOM) recently acquired XTO Energy, giving the two giants exposure to Utica.

  • Hess (NYSE: HES), CONSOL Energy (NYSE: CNX) and PDC Energy are also active in the region, along with Devon Energy (NYSE: DVN) and Anadarko Petroleum (NYSE: APC).

M&A Possibilities and Ohio's Steel Industry

As the prospect at the Utica becomes clearer, some other smaller companies with exposure, similar to XTO and Atlas, may become attractive M&A targets to larger companies.

Prime takeover targets may include:

  • Rex Energy Corp. (Nasdaq: REXX), which holds acreage in the Utica with a market cap around $645 million.

  • Another would be Magnum Hunter Resources (NYSE: MHR), with a $530-million market cap.

  • Gulfport Energy Corporation (Nasdaq: GPOR) is more than double the size of Magnum Hunter and Rex at $1.35 billion, but also operates at a profit, unlike those other two.

And keep an eye on steel companies around eastern Ohio, such as AK Steel Holding Corporation Co. (NYSE: AKS) and Timken Company (NYSE: TKR), which could benefit from the increased drilling activity in the region.

According to Rigzone, "Steel remains an important industry in Ohio, and the anticipated boom in the Utica shale drilling has led to commitments from steel companies in Ohio to expand facilities for manufacturing oil and gas equipment."

Utica Shale Production's Tempered Expectations

While the Utica could certainly turn out to live up to the expectations being pumped up by McClendon and the OOGEEP, it's still early in the game. There are only 16 wells, and we still don't know much about shale drilling and its long-term effects on the environment.

In the more populated Northeastern United States, it may face more public opposition than in more rural parts of the country, such as the Bakken and Eagle Ford, and even the Marcellus shale plays.

But the fact that it's early could also mean it's a good time to get in on the fun. While recent news is certain to drive prices up in the short term, it may be wise for those bullish on the Utica to wait until the buzz dies down.

Another approach may be to add small positions now and slowly increase them as things become clearer in the region.

Whatever the case, there's certainly room for some optimism with the talk of new jobs and a rejuvenated economy in the rust belt.

Good investing,

Justin Dove

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