Utica Shale is one of the newer unconventional plays fueling the American drilling revival. But this baby is making plenty of noise as production ramps up and pipeline builders race to keep up.

Pipelines follow rigs, and the Utica is one of the most popular destinations for drillers and their money.  As a result, there is plenty of growth ahead for MLPs and other midstream operators capitalizing on the rush to build out the badly needed infrastructure.

This article will assess recent developments in the basin, survey the project slates of the major pipeline players and identify those with the strongest prospects.

A Tempting Target

The Utica is a layer of 450-million-year-old rock several thousand feet beneath the better known but less extensive Marcellus Shale. Like the Marcellus, the Utica spans significant portions of Pennsylvania, New York, West Virginia and Ohio. The choicest bits explored to date lie in southeastern Ohio, where the Utica sits closer to the Marcellus and the surface, making wells cheaper to drill, yet contains a relatively large proportion of oil and natural gas liquids (NGLs), more valuable than dry natural gas.

Estimates of the Utica’s resource potential remain a matter of educated guesswork. A year ago, the US Geological Survey pegged its recoverable reserves at 940 million barrels of oil, 208 million barrels of NGLs and 38 trillion cubic feet of natural gas. Meanwhile, the Ohio Department of Natural Resources guesses it might contain 1.3 billion to 5.5 billion barrels of oil and 3.8 trillion to 15.7 trillion cubic feet of gas.

The low end of those estimates suggests reserves equivalent to a year or two of total production by ExxonMobil (NYSE: XOM). The high end would keep an Exxon busy for the better part of the decade.

But ExxonMobil isn’t a player in this region, where the extremely modest total production to date has to this point been dominated by Chesapeake Energy (NYSE: CHK). And total recoverable resources are not the big draw for the drillers: after all the current best-case estimate for the Utica credits it with only a tenth of the gas thought to be recoverable from the Marcellus. Rather, the producers are chasing what are thought to be some of the highest rates of return among unconventional shale plays.

For example, in February Credit Suisse estimated the internal rate of return (IRR) — a common measure of resource profitability in the oil and gas industry — at 36 percent for the liquids-rich portion of the Utica, trailing only a handful of even more lucrative locations such as the liquids-rich sweet spots of the Marcellus and the Eagle Ford.

Others are even more optimistic. Magnum Hunter Resources (NYSE: MHR) which recently expanded its Utica acreage, calls it “potentially [the] best shale play in the US,” citing strong flow rates aided by the Utica’s distinctive geology. Another significant Utica player, Gulfport Energy (Nasdaq: GPOR) recently estimated its IRR on recent Utica wells at 55 to 77 percent. Chesapeake hasn’t provided an IRR but has called its early Utica returns “outstanding” and plans to quadruple its average daily production from the play by the end of the year as support infrastructure comes on line. As of August, Chesapeake accounted for 77 of the 125 producing Utica wells in Ohio.

But perhaps the greatest vote of confidence in the Utica was recently given by Aubrey McClendon, the man who nabbed so much of the best land in Utica for Chesapeake before getting fired by the company he founded after running up excessive debt. McClendon may never be a penny pincher but he is widely considered one of the wiliest operators around, and he’s betting a lot of capital raised recently by his new private company on leasehold acquisitions in the Utica.

The land deals suggest Utica optimists are finally backing their hopes with serious money, which should soon translate into many new wells, and with them the need for gathering systems, processing plants and long-haul pipelines.

And the Winners Are…

MarkWest Energy Partners (NYSE: MWE) is already the leading natural gas processor and NGL fractionator in the Marcellus, and the master limited partnership is aiming for a similar leadership role in the Utica via a joint venture with EMG Group, a Houston private equity firm that has agreed to finance  up to $950 million of the JV’s investments.

That money is being spent to expand MarkWest’s current 185 million cubic feet (MMcf) of daily Utica gas gathering and processing capacity to nearly 600 MMcf/day by year’s end and almost 1,000 MMcf by the end of 2014.

Source: MarkWest Energy Partners presentation

To that end, MarkWest has signed dedicated acreage gathering deals with aggressive Utica drillers Gulfport, Antero Resources and Rex Energy (Nasdaq: REXX).  Their gas will flow to the two cryogenic processing units under construction at its Seneca plant in Ohio’s Noble county, each with the capacity to process 200 MMcf/d when both come on line later this year. Next year, a third unit is slated for that site, while a concurrent expansion of the Cadiz facility to the north in Harrison county will more than double that plant’s processing capacity from the current 185 MMcf/d.

The joint venture, MarkWest Utica EMG ,is also building an NGL fractionation plant in nearby Hopedale, Ohio, which will receive de-ethanized NGLs from the Cadiz and Seneca plants as well as Pennsylvania and produce propane and other value-added liquids. The Hopedale plant, with a processing capacity to 100,000 barrels per day (b/d), is due to come on line in the first quarter of 2014.

That’s a lot of expensive construction for a venture that’s expected to account for just 1 percent of MarkWest’s operating income this year, while consuming 21 percent of the partnership’s capital spending.

Longer term, MarkWest has unveiled plans for a joint venture with Kinder Morgan (NYSE: KMP) that would build a large-scale processing plant in Tuscarawas county west of Cadiz with an initial processing capacity of 200 MMcf/d, expandable to more than 1 billion cubic feet daily based on customer commitments. Gas would enter facility via a converted section of Kinder Morgan’s Tennessee Gas Pipeline (TGP) and NGLs would be sent via another converted section of the TGP as well as new pipes on a 1,100-mile journey to Mont Belvieu, Texas along the Gulf Coast. The pipeline, which would have an initial capacity of 200,000 b/d that could eventually be doubled, would enter service in late 2015 pending regulatory approvals. MarkWest Utica EMG would have a 50 percent stake in the processing plant and a stake of up to 25 percent stake in the Gulf Coast pipeline.

The partnership with EMG gives MarkWest an outside source of capital that may look to cash out once the infrastructure is built, as it did in selling to MarkWest its interest in a similar joint venture for the Marcellus. EMG is headed by John Raymond, son of former Exxon Mobil CEO Lee Raymond, and is also bankrolling McClendon’s Utica push. EMG and Kinder Morgan are valuable and reliable business partners.

Access Midstream Partners (NYSE: ACMP) is the successor to Chesapeake Midstream, after buying Chesapeake’s midstream assets in the Utica and elsewhere in a $2.2 billion deal in December. Simultaneously, Williams (NYSE WMB) acquired a 50 percent stake in Access Midstream’s general partner from the master limited partnership’s private equity sponsor for $2.4 billion.

The deal left ACMP with a 66 percent stake in the Cardinal joint venture operating five gathering systems in Utica’s wet gas window (Total (NYSE: TOT) and Enervest are the minority partners) as well as full ownership of four gathering systems in the dry gas window.

Source: Access Midstream Partners presentation

Access Midstream  also owns a 49 percent stake in the processing and fractionating joint venture Utica East Ohio Midstream, alongside closely held Momentum Midstream, the operating partner with a 30 percent ownership stake, and Enervest affiliate EV Energy Partners (Nasdaq:  EVEP), which owns the remaining 21 percent. In July, the venture placed into service a 200 MMcf/d cryogenic processing plant near Kensington in Ohio’s Columbiana county and an NGL fractionation, storage and rail facility in Scio, Harrison county, capable of handling 45,000 barrels per day.

Both the processing and the fractionating capacity are expected to double by the end of the year. And by the time the third stages are completed next year, along with another processing plant in the Carroll county hamlet of Leesville, OH to the south, Utica East Ohio Midstream will be capable of processing 800 MMcf/d of gas, fractionating 135,000 b/d of NGLs and storing 870,000 barrels at a rail facility capable of loading 90 cars per day, at a total planned cost of $900 million.

This complex will process the output of Chesapeake, Total and EV Energy Partners. It will connect to the Enterprise Products Partners (NYSE: EPD) ATEX Express pipeline moving ethane and eventually propane from the Marcellus and the Utica to the Gulf Coast. The ATEX is expected to enter service early next year.

The third major midstream player in the Utica is Blue Racer, a gathering and processing joint venture based on Dominion East Ohio’s distribution network in the region. Parent Dominion Resources (NYSE: D) owns a 50 percent stake based on those assets, while Caiman Energy II, a private equity consortium, owns the other half and is supplying  up to $800 million of investment spending. Williams-affiliated MLP Williams Partners (NYSE: WPZ) owns 47.5 percent of Caiman.

Blue Racer’s blueprint and the Utica. Source:  Caiman Energy presentation

Blue Racer controls more than 500 miles of rich-gas gathering pipes in eastern Ohio, as well as a 200 MMcf/d Natrium processing plant across the Ohio River in West Virginia, which went into service in the summer. Natrium’s capacity is set to double by the first quarter of next year, but at the moment the plant remains offline following a Sept. 21 explosion and fire, and there has been no announcement about a restart date or the accident’s effect on the expansion schedule.

Natrium also has the capacity to fractionate up to 36,000 NGL barrels a day, set to rise to 59,000 b/d next year. In addition, Blue Racer plans to build 200 MMcf/d processing plants at Berne in Ohio’s Monroe county, Petersburg in Mahoning county, along with additional transit pipelines. Another processing plant near Lewis in Harrison country is under consideration by Blue Racer.

Dominion plans to spin off its stake in Blue Racer and the newly permitted liquefied natural gas (LNG) export terminal at Cove Point on Maryland’s Chesapeake Bay into a publicly traded master limited partnership with annual Ebitda (earnings before items) of $1 billion to $2 billion.

In addition to their interests in Blue Racer via Caiman and in Access Midstream’s general partner, Williams and Williams Partners are also investing in Utica gathering and processing directly. The Ohio Valley Midstream operating segment of Williams Partners runs the 320 MMcf/d Fort Beeler processing plant in West Virginia’s Marshall county as well as the nearby Moundsville fractionator on the Ohio border, which is expected to have an expanded capacity of 43,000 barrels of NGLs a day by the end of the year. Williams Partners is also building the 200 MMcf/d Oak Grove processing plant nearby, along with the pipes connecting the entire processing complex to long-haul transit lines. It plans to invest $1.6 billion in expanding Ohio Valley Midstream over a three-year period ending in 2015.

Source: Williams presentation

Another Utica player is Pennant Midstream, a joint venture between NiSource (NYSE: NI) and closely held driller Hilcorp that’s investing $300 million in a gathering system spanning western Pennsylvania and the Mahoning and Columbiana counties in Ohio as well as a 200 MMcf/d processing plant in Mahoning county that will be linked via pipeline to the Utica East Ohio’s fractionation hubs.

The flood of ethane and heavier NGLs unleashed by Utica drilling will ultimately head for markets far beyond the region, providing opportunities for a gaggle of eager shippers.

Enterprise Products Partners’ 1,230 mile ATEX (Appalachia to Texas) pipeline set to enter service in the first quarter of 2014 is the first mover, with the capacity to ship 190,000 barrels of ethane a day from western Pennsylvania to Mont Belvieu on the Texas Gulf Coast.

It will have little competition along that route until late 2015, when the proposed Kinder Morgan/MarkWest joint venture may begin shipping 200,000 bpd from eastern Ohio to Mont Belvieu.

At around the same time, Williams and Boardwalk Pipeline Partners (NYSE: BWP) hope to complete their joint-venture Bluegrass Pipeline with the initial capacity to ship 200,000 bpd of NGLs from western Pennsylvania to the Louisiana coast. Unlike the ATEX, Bluegrass would ship commingled NGLs to the planned Moss Lake fractionation plant near Lake Charles, La., that would separate the stream into ethane, propane and butane for shipment overseas via a nearby liquefied petroleum gas (LPG) export terminal. The terminal, announced by the joint venture partners last week, would have the capacity to store 900,000 barrels of refrigerated propane and butane, and a loading rate of 25,000 barrels an hour.

Not all of the Utica’s NGLs are destined for the Gulf Coast. Mark West Energy partners, in a joint venture with Sunoco Logistics Partners (NYSE: SXL) plans to ship Utica and Marcellus ethane to Ontario petrochemical plants via  a refitted and reversed Sunoco pipeline in what is known as the Mariner West project. The pipeline is expected to open any day with an initial capacity of 20,000 barrels per day, rising to 50,000 b/d by the end of next year’s first quarter.

Sunoco has an even more ambitious project to pipe up to 70,000 barrels of Marcellus and Utica propane, and eventually ethane, from Mark West’s Houston, Pa. fractionation hub to Sunoco’s Marcus Hook processing plant and export terminal near Philadelphia on the Delaware River. From there, propane could be exported overseas as soon as late 2014, followed by ethane in 2015.

Source: Williams presentation

Two companies stand above the rest in this web of rivalries and joint ventures as most promising plays on Utica’s growth and success. MarkWest’s record of industry-leading returns, its preeminent scale in the overlapping Marcellus and relationships with some of Utica’s most prospective drillers as well as some of the energy industry’s best-connected players are hard to beat. It’s also well placed to parlay its Utica strength into stakes in pipelines exporting from the region, whether to the Gulf Coast, the East Coast or Canada.

But Williams Partners is a big player in the Marcellus as well, and no one has their fingers in more Utica pies. Between its own gathering and processing assets in the region, the stake in the Blue Racer joint venture via Caiman, and the interest in Access Midstream with its ties to the basin’s leading driller, Williams has lots of ways to win and grow. For more on both of these MLPs see Best Buys.

As the number of partnerships pooling their resources to develop the Utica suggests, the undertaking isn’t cheap. But the number of players also speaks to the fact that many well-regarded energy executives believe the basin has some of the best return profiles in the continental US.  It’s a crowded field, but that’s only because the payoffs are so tempting.