Three Charts That Explain Why Chesapeake Is Drilling In Utica

-98.08%
Downside
88.83
Market
1.70
Trefis
CHK: Chesapeake Energy logo
CHK
Chesapeake Energy

Though Texas’ Eagle Ford shale will be the main driver of Chesapeake Energy’s (NYSE:CHK) oil production growth for the next few years, the company’s acreage in Ohio’s Utica shale should also be a important contributor to its natural gas liquids (NGLs) production growth. Chesapeake was one of the first companies to recognize the potential of the Utica Shale, having discovered it in 2010. Now, Chesapeake is the most active driller and largest leasehold owner in the Utica, with about 1 million net acres under its belt.

In the Q2 2014, Chesapeake’s Utica shale production was 67 million barrels of oil equivalents per day(mboe/d), up 373% from a year ago and up 34% from the first quarter of 2014. Of the total production, Oil accounted for 10%, natural gas 60% and natural gas liquids like ethane, butane and propane about 30%. While that’s an impressive rate of growth, it could have been even higher. At the end of last year, the company had 208 wells in various stages of completion, with many awaiting pipeline connections.

As the gas processing and pipeline takeaway capacity at Utica is expected to expand significantly this year, this should change. With the addition of a second train in December, the processing capacity from the Kensington plant — a joint venture between Access Midstream Partners, EV Energy Partners and M3 — had doubled by the beginning of February. Access Midstream and EV Energy are also in the process of laying gathering pipelines to deliver Chesapeake’s production to the plant. The presence of a few other such projects means that Chesapeake can double its gross processing capacity in Utica from 400 million cubic feet per day as of the end of 2013, to 800 million cubic feet per day by the end of this year. This should allow the company to get cracking on many of the backlogged wells and generate sales, as well as boost its production.

Relevant Articles
  1. Will Chesapeake See Improved Results In 2019?
  2. Higher Oil Output And Better Pricing To Drive Chesapeake’s 3Q’18 Results
  3. Factors That Will Drive Chesapeake Energy’s Value In The Next Two Years
  4. Chesapeake Q2 Earnings Preview: Commodity Price Strength and Operational Efficiency To Drive Growth
  5. What Factor Is Driving Chesapeake’s Stock Rally?
  6. Key Takeaways From Chesapeake’s Q1

Despite these factors, there have been some doubts among investors as to the financial potential of the Utica Shale. Halcon Resources, a competitor to Chesapeake, has virtually abandoned its efforts to develop its acreage in the Utica Shale, while Chesapeake keeps on investing more and more resources into the same. To understand this difference, we need to appreciate the fact that Chesapeake was the first company to turn a well into production at the Utica Shale, about three years ago. Its competitors did not start drilling for at least another year. The extra time spent by the company in the region meant that it was able to drill more than all of its competitors combined in the region. Additionally, the company was able to invest in building knowledge of the rocks beneath the acreage. In that time, CHK has amassed nearly a mile of core samples that it can use to understand the reservoir flow and to optimize completions. Furthermore, it has over 600 miles of 3D seismic data from the region, which it can use to understand the structure and to optimize lateral placement. The result should be that when the company drills in the region, it is more likely than its competitors to be successful.

((Source: Chesapeake Investors Day Presentation 2014))

Not only does the company have the most knowledge of the region, it is also generating the best results from its wells in the region. Chesapeake can drill its well faster and for cheaper rates, resulting in a higher rate of return on its investments in the region. When the company invests capital in a non-operated well drilled by a company like Hess, its rate of return on those well averages around 4%. However, when the company invests in a well that it operates itself, it earns close to 20%. Those returns are only expected to improve as the company keeps drilling in the region. These results are why Chesapeake Energy continues to drill in the Utica Shale while competitors have either stopped drilling or sold their assets.

((Source: Barclays CEO Energy-Power Conference 2014))

The high-return wells indicated above are being drilled in what is known as the wet gas window, which is rich in natural gas liquids such as propane and ethane. Energy producers are also starting to see strong results in the dry natural gas portion of the play. Most of these wells were drilled along Ohio’s border with West Virginia and Pennsylvania. However, the industry appears to be just scratching the surface of the Utica shale’s potential, as recent wells by Royal Dutch Shell have shown strong natural gas production too. The difference is that these wells were drilled more than 300 miles to the east in Pennsylvania. These wells, which are near the Pennsylvania-New York border, could extend the play hundreds of miles further to the east than was previously thought by energy companies. Shell is highly optimistic because the initial production rates of its first two wells were as good, if not better, than the wells Chesapeake Energy and others in the industry have drilled in Ohio. These results indicate that the Utica shale is much bigger than producers originally thought.

((Source: Barclays CEO Energy-Power Conference 2014))

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap

More Trefis Research