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Insight: In Ohio, the fog begins to lift over the Utica shale

By Edward McAllister

NEW YORK (Reuters) - Shares of Gulfport Energy were in free fall last spring, dropping 55 percent in four months, until the oil and gas producer announced it had drilled its first three wells in the Utica shale formation in Ohio.

The Oklahoma-based company's value has since more than doubled, bolstered by a series of company production updates on those and a handful of other new wells located in what many believe to be the next frontier in America's oil and gas revolution.

The share price gain represents perhaps the clearest example of how investors, giddy about an expected boom in Ohio's energy production, have been betting on companies based on some optimistic, but preliminary, production data.

But next month a more comprehensive state report will publish new data from Ohio's oil and gas wells that will offer the most insight yet about whether the Utica is the next big thing or a potentially fizzling bust for companies operating there.

Energy producers in the Buckeye State have compared the Utica to the giant Eagle Ford shale play in Texas and declared it a boon for a state still weathering an economic downturn. However, enthusiasm has cooled somewhat since drilling began in 2011, after wells produced more cheap natural gas than the more lucrative oil.

On March 31 this year, data from between 50 and 60 wells drilled in 2012 will be given to the state. It will then be made available on the Ohio Department of Natural Resources' website in April, the department said. It did not give a specific date but last year the report came on the second of the month.

While around 500 drilling permits have been issued in the state since 2011, only those wells that have actually produced will be covered in the report. It will show output over the lifetime of every new well, its location, and its owner, providing some proof of which acreage, and which companies, are performing best.

"It is a meaningful sample of wells that will go a long way toward giving investors a sense of whether the Utica is the next big thing," said Morningstar analyst Mark Hanson, who covers companies operating in the state.

UTICA SILENCE

Ohio publishes well data only once a year, making it one of the least transparent states in reporting energy output. Most states publish every quarter. On April 2 last year, production was published from just five wells. That is the only official state record on the play two years after drilling began there.

Results from the five wells drilled by Chesapeake Energy in Carroll and Harrison counties showed lower than expected oil production, and stronger natural gas output, the state report said.

Since then, a long list of companies, including Britain's BP , Anadarko Petroleum and Hess Corp , have acquired acreage in Ohio. Most remain quiet about their progress for fear that it will push lease prices higher.

"It has to do with the competitive nature of things," said Mark Houser, chief executive officer of EV Energy Partners which, together with its parent company Enervest Ltd, owns more than 800,000 acres in the Utica. "If you have a good acreage position, you still may want to buy the acre next door. You don't want to have everything public."

BP, Anadarko and Hess did not respond to request for comment for this story.

Devon Energy is in the process of selling more than 200,000 acres in the Utica after drilling a series of what a company spokesman described as "disappointing" wells in what it expected to be oil-producing acreage. Chesapeake Energy, which did not immediately respond to calls for comment, has also sold off a portion of its more than 1 million acres there.

"The little I have seen from the Utica shows it has been a bit disappointing given the expectations," said Phil Weiss, an analyst with Argus Research who covers companies drilling there. "Given that the amount of information is relatively sparse, people will be paying attention."

PEAK RATE, SHAKE AND BAKE

Meanwhile, smaller companies such as Gulfport, Rex Energy and Magnum Hunter Resources , with a proportionately bigger stake in the Utica, have more to lose if the play turns out to be a dud.

Rex Energy and Magnum Hunter did not immediately respond to requests for comment.

Of the smaller companies, Gulfport's share price has shown the most remarkable rise since the first half of last year and the company in many ways encapsulates both the hype about the Utica and the difficulty in deciphering its true potential. (Share price graphic: http://link.reuters.com/tab86t )

Since June, 2012, when it announced it had drilled its first three Utica wells, Gulfport's share price has risen 156 percent, from below $17 to more than $43 on March 18, as the company began reporting initial flow rates from the new wells.

But as the April deadline for reporting well production looms, experts will be watching closely for whether Gulfport's preliminary data holds up to further scrutiny.

"Ultimately, the production and estimated ultimate recovery of our wells and those of our peers will provide definitive answers," said Paul Heerwagen, Gulfport's director of investor relations.

The company, which owns 128,000 net acres in the Utica, published impressive "peak rates" of gas and condensates from its Utica wells, a measurement of initial flows taken over a limited time period, usually no longer than 24 hours. A peak rate is typically much higher than eventual longer term output that declines over time.

"The peak rate is more a bragging type thing," said Randall Collum, a natural gas production analyst at data provider Genscape. "It is nice to know and gives some indication of potential production, but I would rather get a longer term outlook."

During a quarterly conference call with analysts on Feb 27, Gulfport chief executive James Palm revealed longer term rates for two wells, which had fallen off significantly from the first flows.

Natural gas output from the Wagner 1-28H well fell from a peak rate of 17.1 million cubic feet per day reported on August 7 to an average of 5.2 million cubic feet per day after 129 days of production. Output of gas condensates fell from 432 barrels per day to 94 bpd.

Decline rates are normal, and Gulfport executives said on February 27 that output from the Wagner well has increased slightly since the end of the year.

Gulfport is not alone in reporting peak rates. Rex Energy chief executive Tom Stabley said he was "very excited" about output from three new Utica wells in a statement on March 18 that disclosed 24-hour test rates for the wells.

But the speed of the declines in the Gulfport wells, and the scarcity of longer term data, makes it hard for investors to judge whether it will be a good long-term investment.

"The first four months show that the peak rate was not over-representative of what could ultimately be recovered from the well," said Morningstar's Hanson.

Further muddying the water is a new technique known in the industry as 'shake and bake' or 'resting', where a well is plugged for a number of days or months after drilling to increase pressure in the well. Shake and bake, an unproven method that companies hope might improve recovery from a well over its lifetime, can increase initial flows by raising pressure, said Gulfport's Heerwagen, though it is not yet clear if it increases flows long term.

So far, more than 500 well permits have been issued in the Utica since 2011, many of which are expected to begin producing as new pipelines and processing plants are built to connect wells to markets as early as this spring.

As more wells are drilled, more information will be made available - but not for a while. The data on wells drilled in 2013 will remain largely unknown until April 2014.

(Reporting By Edward McAllister; Editing by Claudia Parsons)

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