By DANIEL GILBERT And RYAN DEZEMBER
Aubrey McClendon, CEO of Chesapeake Energy Corp., once described oil buried in a layer of rock that stretches from the outskirts of Cleveland to West Virginia as "the biggest thing to hit Ohio since the plow."
Mr. McClendon bet big on that new oil field, the Utica Shale, paying billions of dollars over the last two years for drilling rights to 1.3 million acres of it, or about 5% of Ohio's land area.
Now, Chesapeake is raising its bet—ramping up drilling on a promising but unproven oil field, at a time when the embattled natural-gas giant is under financial stress and facing heightened scrutiny from investors.
Battered by the lowest natural-gas prices in a decade, Chesapeake is selling off some of its most lucrative assets and taking out increasingly expensive loans in a bid to transform itself into an oil power. The cash-strapped company, whose stock market valuation is under $10 billion, has more than $13 billion in debt on its balance sheet and total obligations of close to $24 billion, ratings agencies say.
Key to its ambition is the Utica, which Ohio officials estimate holds 1.3 billion to 5.5 billion barrels of oil. The Utica, which spans parts of five states, often draws comparisons to the huge Eagle Ford Shale in Texas, which could hold 3.4 billion barrels of oil, according to the U.S. Energy Information Administration. On Tuesday, a Chesapeake executive told an industry conference in Austin that the Utica could generate a higher rate of return than any of Chesapeake's other properties.
But analysts say that relatively little is known about the true potential of the Utica. Chesapeake has only released results from nine of the 59 wells it has drilled in the Utica, and none of the nine have been in operation for long. Chesapeake says that oil made up less than a third of its average peak production from eight of the wells, with natural gas accounting for half and the rest coming from liquid gases like ethane and propane.
The limited data the company has released "fail to wow," analysts at Sanford C. Bernstein & Co. wrote last month.
None of the nine wells is in what executives call the "oil window," the sweet spot the Oklahoma City-based company believes holds the most crude.
"We haven't cracked the code on the oil window," Mr. McClendon said at an industry conference last month in New York. "The prize is big if you can do that."
The Utica is far from Chesapeake's only oil property. It is spending more money on the proven Eagle Ford in south Texas and ramping up drilling in the Mississippi Lime field that straddles the border between Oklahoma and Kansas.
Chesapeake isn't alone in its belief that the Utica holds a lot of oil. BP PLC, Exxon Mobil Corp., Hess Corp., Anadarko Petroleum Corp. and Devon Energy Corp., among others, have bought Utica drilling fields in Ohio. In December, Total SA, the French oil giant, paid Chesapeake $610 million for a stake in its holdings in the Utica, with the promise to cover $1.4 billion of drilling costs. Total declined to comment.
"While we agree with the view that the Utica is an emerging play and there is little publicly available well information, we have drilled and tested a sufficient number of wells for us to have a high level of confidence," Jim Gipson, a Chesapeake spokesman, said Wednesday. The company plans to disclose details about its oil production in the coming months, he said.
Chesapeake has staked more on the Utica than any other producer by far. It has leased twice as much land as its nearest competitor, Chevron Corp. Of the 223 permits the state has issued for Utica wells, Chesapeake has obtained 162. It is drilling with 10 rigs there, the most of any company, and plans to operate 22 rigs in 2013, which would amount to almost 18% of its working rigs.
Chesapeake is continuing to expand its holdings in the Utica. In the first quarter of this year, Chesapeake spent $900 million acquiring drilling rights—more than half of what it has budgeted for the entire year—with much of the activity in the Utica, where it had already spent $2 billion. The company said Tuesday that it plans to dedicate 8% of its capital spending, or up to $600 million, on the Utica in 2013, which doesn't include Total's contribution.
Ramping up drilling may help Chesapeake demonstrate the oil and gas potential in the Utica, allowing it to add to its reserves. Until that potential is proven by drilling, the company can't use its Utica holdings as collateral to take out reserve-based loans because the amount of oil and gas there is uncertain, said Neal Dingmann, an analyst with investment bank SunTrust Robinson Humphrey Inc. Chesapeake currently draws on a $4 billion line of credit, backed by reserves, for its daily cash needs.
To raise cash, Chesapeake in December 2011 completed a sale of $1.25 billion in preferred shares in a newly created subsidiary for some of its Utica holdings to private-equity firms led by EIG Global Energy Partners. Chesapeake must pay a steep 7% annual return to the investors, as well as 3% of the royalties from the first 1,500 wells, beginning this year and is committed to drilling 50 wells a year in the Utica through 2016.
The company is under pressure to raise as much as $11.5 billion before the end of the year to bridge a widening gap between its cash flow and spending. It is shopping its entire 1.5 million acres in a lucrative west Texas oil field, which makes up 5% of its production, to pay for drilling in places like the Utica that it believes will prove even more profitable.
The cash crunch, combined with corporate-governance controversies, has pushed Chesapeake's stock down 51% in the last 12 months. It closed Wednesday at $15.09.
For years, Mr. McClendon has taken a small stake in every well that Chesapeake drills, sharing equally in their costs and profits. In November, he pledged his stakes in the company's wells in the Utica and elsewhere as collateral to borrow up to $1 billion from EIG, which didn't become widely known until April.
The revelation that he borrowed from a company doing business with Chesapeake has rocked the company in recent weeks. Chesapeake has said that allowing Mr. McClendon to invest in the wells aligned him with shareholders and that his borrowing didn't pose a conflict of interest, though they have agreed to end the practice in 2014. Board members are reviewing his financing deals with firms that have relationships with Chesapeake.
Mr. McClendon has apologized for what he calls "distractions" and agreed to step down as chairman. But he has not changed his tune about the Utica.
Earlier this month, Mr. McClendon said that a natural-gas well drilled in Ohio's rural Harrison County "may very well be our best shale well ever."
Analysts say it is too early to determine whether the Utica will prove as profitable as other major U.S. oil fields.
"It's an Eagle Ford lookalike, it's got that kind of potential," said David Tameron, a senior analyst at Wells Fargo Securities LLC. But he cautioned, "We don't have a history with any of these wells."
Write to Daniel Gilbert at daniel.gilbert@wsj.com and Ryan Dezember at ryan.dezember@dowjones.com