Utica Shale Prospects Dim Amid Disapponting Lease Offers

Chesapeake Energy Corp. and other oil and natural-gas explorers in Ohio’s Utica Shale may have a tougher time raising drilling cash from joint ventures as investors trim offerings for stakes in undrilled fields.

PDC Energy Corp. didn’t receive a high enough bid from would-be joint-venture partners for an interest in its Utica holdings and will develop the acreage on its own, the Denver-based company said today in a statement.

PDC’s failure bodes ill for Chesapeake, the U.S. gas producer that’s searching for a joint-venture partner for its Utica assets, touted as a discovery to rival the Eagle Ford Shale in Texas. Chesapeake won’t get anything close to the $15,000 an acre Total S.A. paid last year for a stake in some of its Utica fields, said Neal Dingmann, an analyst at SunTrust Robinson Humphrey Inc.

“The numbers are going the wrong way,” Mark Hanson, an analyst at Morningstar Investment Services in Chicago, said in a telephone interview today.

In addition to PDC and Chesapeake, the “best positioned” explorers with Utica holdings include Gulfport Energy Corp. of Oklahoma City, Rex Energy Corp. of State College, Pennsylvania, and Magnum Hunter Resources Corp. of Houston, Dingmann said in an Aug. 30 note to clients.

“This indicates it’s still too early to say the Utica is the next big thing,” Hanson said.

Best in Play

PDC held drilling rights on 45,000 acres in the Utica as of June 30, according to data compiled by Bloomberg Industries. PDC didn’t disclose the rejected bid amounts or its minimum asking price in today’s statement. The company’s shares fell 5.9 percent to $30.99 at the close in New York.

About half of the 45,000 acres PDC controls constitute “the best in the play,” Dingmann said in a telephone interview from Houston today. The company’s inability to garner a satisfactory bid for superior holdings signals “Chesapeake is facing a difficult position” as it seeks to raise cash to plug a funding shortfall, he said.

Chesapeake sold a 25 percent stake in 542,000 Utica acres for $2.03 billion on Dec. 30 to France’s Total, a per-acre price that was more than four times the average proceeds from seven Utica shale transactions tracked by IHS Inc. from March 2011 to September 2011.

“It’s going to be very tough for Chesapeake to get anything close to that,” Dingmann said.

Jim Gipson, a spokesman for Oklahoma City-based Chesapeake, declined to comment in an e-mailed statement.

Funding Gap

Chesapeake Chief Executive Officer Aubrey McClendon said during a Sept. 6 conference call that the company plans to find a joint-venture partner for some of its 1.3 million acres of Utica leases next year. The transaction will be part of McClendon’s effort to raise at least $4.25 billion in 2013 to close a gap between cash flow and expenses.

Chesapeake announced $6.9 billion in asset sales last week that included oilfields, pipelines and gas-processing plants from Texas to Ohio. With 80 percent of its output in the form of gas, Chesapeake has been grappling with a North American glut of the power-plant and furnace fuel that drove prices to a 10-year low in April.

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