Over the last few quarters, Chesapeake Energy (NYSE:CHK) has been ramping up its oil and liquids production, diversifying its revenue stream away from the volatile natural gas market. Now, oil accounts for a bulk of the company’s revenues and much of the company’s transformation from being primarily a natural gas company to an oil producer has been spearheaded by its assets in the Eagle Ford Shale in the south of Texas. In this article, we take a brief look at Chesapeake’s operations in the Eagle Ford shale and why it remains one of the company’s most promising plays.
Overview Of Chesapeake’s Operations In The Eagle Ford
The Eagle Ford shale play is broadly defined into three zones – the oil zone, the condensate zone and the dry gas zone. Chesapeake owns a net of 380,000 acres in this play and its operations are largely centered on the liquids rich window of the play. Chesapeake’s operations in the Eagle Ford are structured as a joint venture with the China National Offshore Oil Corporation (CNOOC), which holds a 33% stake. However, Chesapeake serves as the operator and conducts all the leasing, drilling completion and marketing operations for the play. The company’s oil production from the Eagle Ford shale has been commendable growing by close to 44% CAGR over the last two years and the company is now the second largest oil producer in the play, behind EOG resources.  As of the second quarter, production crossed 57,000 barrels of oil per day, which means that roughly half the company’s total oil production comes from this play.  The company also recently increased its oil production guidance for this year to between 38 million and 40 million barrels citing stronger production from the Eagle Ford play. 
Although Chesapeake offloaded around 55,000 net acres in the Eagle Ford shale earlier this year to EXCO Resources for roughly $680 million, the sale is unlikely to have a significant impact on the company’s production given that the divested acreage was viewed as being less prospective and any production declines will be offset by production gains in other parts of the play.
The Eagle Ford Play Is Driving Efficiencies
The Eagle Ford shale will remain one of Chesapeake’s most important plays going forward. The company has allocated nearly 36% of its drilling and completion budget for FY2013 to this play and currently operates around 11 rigs here.  The Eagle ford shale is also proving to be one of the key drivers of the company’s capital discipline. Drilling efficiencies have been improving as the company has been carrying out more pad drilling in the basin and spud-to-spud cycle times for drilling wells have decreased from around 21 days last year to about 16 days. The company expects pad drilling based cost improvements to the tune of 20% for this year. Well costs have declined from around $9 million per well in the initial stages of the play to around $7 million currently, and Chesapeake expects this to decline further to around $6.5 million. The rising production coupled with declining costs are likely to bode well for the company’s margins going forward.
Trefis has a $24 price estimate for Chesapeake Energy,which is roughly 10% below the current market price.Notes: