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Former Chesapeake CEO McClendon returns to the game in Ohio's Utica Shale

Correction appended.

Aubrey McClendon is buying oil and gas acreage in Ohio and may have found a position in the most productive portion of the Utica Shale field, six months after being forced out as CEO of Chesapeake Energy Corp.

McClendon's new company, American Energy Partners LP, has bought acreage in three counties in southeast Ohio, according to analysts and public documents. That puts him in the same part of the field as GulfPort Energy Corp. and Anadarko Petroleum Corp., which have reported promising results from wells in the Utica this year.

American Energy took over leases this month from a subsidiary of Royal Dutch Shell PLC in Guernsey County, according to a document on file in the recorder's office. American Energy also is believed to have bought 23,000 acres from EnerVest Ltd., which at one time was the biggest leaseholder in Ohio, according to ITG Investment Research in Calgary. EnerVest's former acreage runs in a diagonal line from Harrison County in the northeast, through Guernsey County, to Noble County in the southwest.

"A chunk of the acreage he bought from EnerVest is actually good stuff; it's in the sweet spot of the play," said Ryan Horvat, an analyst at ITG.

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Developers hoped that the Utica would be a rich oil play with large amounts of natural gas, as well, but the oil proved hard to coax from the rock. When natural gas prices plunged in 2012, drillers shifted to Ohio's southeast in search of pipeline gas that also had large amounts of "wet" gas -- ethane, butane, propane and an ultra-light form of crude known as condensate, which looked to add value to the pipeline gas production. Then prices for these gas liquids prices fell.

Still, ITG estimates that wells in what it calls the lean and rich condensate window, including some of American Energy Partners' leases, could make an 82 percent internal rate of return if the price of natural gas rose to $4 per million British thermal units.

Companies that have already drilled in the area are leasing nearby acreage, an indication that they're confident they can make money, said Jeanie Oudin, an analyst at the research firm Wood Mackenzie in Houston.

A spokesman for American Energy Partners declined to comment. A call to Shell's media line wasn't returned.

EnerVest hasn't named the buyer of its acreage publicly. However, American Energy Partners acquired about 130 acres that EnerVest previously leased around Clendening Lake in eastern Ohio, according to documents provided by the Muskingum Watershed Conservancy District.

Utica predictions

McClendon co-founded Chesapeake in 1989 and helped it grow into the second-biggest natural gas producer in the United States.

Chesapeake was an early believer in shale fields, which require horizontal drilling and hydraulic fracturing, or fracking, to produce oil and gas. The company, based in Oklahoma City, also developed a reputation for moving fast and leasing hundreds of thousands of acres in new shale fields before its competitors.

At its peak, the company, based in Oklahoma City, was the biggest or second-biggest owner of acreage in every U.S. shale field except the Bakken formation in North Dakota. McClendon famously predicted in 2011 that the Utica Shale would be the "biggest thing to hit the state of Ohio economically since maybe the plow."

McClendon was forced out of Chesapeake in April amid complaints from investors about the company's spending (EnergyWire, Jan. 31). By June, he had formed American Energy Partners and signed an agreement with SWEPI LP, a subsidiary of Royal Dutch Shell, the Guernsey County document shows.

Earlier this month, American Energy Partners said its subsidiary, American Energy-Utica LLC, had raised $1.7 billion in debt and equity to develop its acreage. Its financial backers include the Energy & Minerals Group, a Houston-based private equity firm that manages $6.7 billion, and First Reserve Corp., another private equity firm. It took out loans from a subsidiary of Blackstone Group and from Magnetar Capital and Blackrock Inc.

John Raymond, CEO of the Energy & Minerals Group (EMG), will sit on American Energy-Utica's board, as will his father, Lee Raymond, the former CEO of Exxon Mobil Corp.

Infrastructure hurdles

The company will drill its first wells later this year and plans to run 12 drilling rigs, according to a news release.

There are challenges, though.

Until now, the anticipated Ohio shale gas boom has been stuck in neutral, awaiting the completion of a entire network of new infrastructure to gather and isolate ethane and other natural gas liquids (NGL) components, and completion of long-distance pipeline links to move products to petrochemical plants and export terminals.

Led by MarkWest Energy Partners, companies have committed more than $6 billion in NGL gathering and processing plants in Ohio and West Virginia to complete the infrastructure buildout.

But even with this surge of activity, analysts have predicted that Utica NGL production would outpace existing and announced pipeline and processing capacity through 2017 or 2018. A Wells Fargo Securities report last May projected total potential supply of 903,000 barrels per day in 2017, but takeaway capacity of 652,000 barrels daily, requiring even more investment.

Since that report, MarkWest Energy Partners and EMG have announced plans for a joint venture with Kinder Morgan Energy Partners to build new a gas liquids fractionization plant and a new pipeline from the Utica Shale to the Gulf Coast.

If bullish production projections prove true, some producers may find part of their shale production shut in until the network expands further, analysts say. Whether McClendon, with his late start, is nearer the front or the tail of the producers' queue could not be learned last week.

Access to pipelines is normally on a contracted basis, said Neil Dingmann, an energy analyst with SunTrust Robinson Humphrey. MarkWest and EMG recruited producers Gulfport Energy Corp. and Antero Resources as initial shippers for their first Utica processing projects at the Seneca and Cadiz complexes. "They are Tier 1 clients," Dingmann said. MarkWest also lists Rex Energy, PDC Energy and Consol Energy as anchor shippers.

It's possible that some lower-tier customers would lose their positions if takeaway capacity becomes strained, Dingmann said.

McClendon's position in the queue for pipeline capacity hasn't been disclosed, he said. But McClendon, like MarkWest, has a strategic relationship with EMG. "One would think he would be able to move up the line," Dingmann speculated.

'They got their acreage through the checkbook'

The next chapter of McClendon's Utica story is also clouded by the price he and his partners have had to pay for prime "wet" acreage in southeast Ohio.

"Acquiring [Utica] acreage is a challenge right now, particularly if you're in the fairway," said Thomas Stewart, executive director of the Ohio Oil and Gas Association. "The only way to acquire acreage there is to go buy it. They got their acreage through the checkbook," Stewart said of lease acquisitions by McClendon's American Energy Partners.

Most of the land in eastern Ohio was broken up into small farms, and the ownership has become even more fragmented during Ohio's 150 years of oil production, said Jerry James, a former president of the Ohio Oil and Gas Association who runs Artex Oil. That makes it hard to assemble the large blocks of land needed for a modern horizontal well.

"When someone tells you they have 50,000 acres in southeast Ohio, it's not like Texas, where they've got 10 sections put together" that are ready to drill, James said. "It's going to take a little horse-trading."

McClendon's background as a landman will come in handy. McClendon, James said, is "the most experienced person, probably in the country, on oil and gas deals."

Correction: An earlier version of this story misstated the amount of debt and equity American Energy Partners LP raised to develop its oil and gas acreage.

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