25 Feb 2014 More

Will Chesapeake Energy Go Down the Same Road Again?

posted by Unknown @ 09:31 0 Comments

Image of the Chesapeake Energy flag
When you say the name Haynesville Shale it brings shudders to some energy execs, especially the higher-ups at Chesapeake EnergyChesapeake sank billions into the play only to sit and watch helplessly as natural gas prices plummeted.

In fact, Chesapeake was in so deep it had to start selling off parcels of the land just to bridge the gap in its books.  Last year alone the company sold off 5600 acres in Haynesville to EXCO Resources.  Proceeds for the sale netted the company $320 million.

The deal also included the company’s position in 170 wells that EXCO already operated.  While the deal was necessary at the time, still at Chesapeake it is a sore spot.  The company was forced to sell its assets at well below previous market value.

A better natural gas climate

With natural gas prices now in the $6 per mcf range, having more than doubled in the last few months alone, Chesapeake may now be on the way back to Haynesville.  Chesapeake entered into the field back in 2008 and is now paying more attention to its assets there. 

In fact, the company says it will spend as much as 10 percent of its current capital in order to fund up to nine rigs in the Haynesville play.  If so, that means a 25 percent increase from last year.

Falling costs add to the bottom line

If Chesapeake can get its costs down to just $7.9 million per well, that would mean a 23 percent reduction from just two years ago.  Multi-well pads have added to cost efficiency and play a big role in keeping down costs.

Chesapeake believes it could even further reduce costs if it adopts the model of the smaller EXCO.  EXCO achieved even lower costs than Chesapeake at just $7.5 million per well in the 3rd quarter of 2013.

Is Chesapeake making the right move?

Right now natural gas prices have spiked, but could Chesapeake be making a hasty move by going all-in back into the Haynesville fields?  Price spikes are usually short-lived and companies are often cautious. 

But this price increase was not fuel by speculators, as is usually the case.  This time the laws of supply and demand were the driving force.  The harsh winter has depleted the once 5 tcf of natural gas to what is expected to be just 1 tcf by winter’s end.

If these estimates pan out, that means it’s going to take a while to get stockpiles back up to previous levels.  That means prices will remain higher, and for a significant period of time.  At least, that’s the conventional wisdom, and that’s what Chesapeake is banking on.

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