Posted on 05/25/2014 9:49:32 AM PDT by ckilmer
May 25, 2014 |
Photo credit: Chesapeake Energy
Last week at its Analyst Day Chesapeake Energy (NYSE: CHK ) unveiled the Utica Shale as its next world-class asset. That's in stark contrast to what Halcon Resources (NYSE: HK ) thinks about the play, as it has virtually abandoned its efforts to develop its Utica Shale acreage. It's divergent opinions like these that make it tough for investors to determine who to believe when it comes to the Utica Shale.
Chesapeake Energy's advantage
Chesapeake Energy already has a long history in the Utica Shale. It was the first company to turn a well into production in June of 2011. The competition didn't start putting wells online until nearly a year later when Hess (NYSE: HES ) brought its first well into production that April. Being first in the basin is proving to be a real competitive advantage for Chesapeake Energy as it has drilled more wells than all of its competitors combined as the following slide shows.
Source: Chesapeake Energy Investor Presentation (Link opens a PDF)
In addition to drilling more wells than all of its competitors, Chesapeake Energy has invested in getting to know the rocks beneath its acreage. The company has nearly a mile of core samples so that it can understand the reservoir flow and can optimize completions as that slide noted. Further, the company has over 600 miles of 3D seismic data which helps it understand the structure to optimize lateral placement. This data allows it to drill wells with a higher degree of certainty of success.
Knowledge yields results
This knowledge of the basin is yielding best-in-class well results. Chesapeake Energy can drill its wells faster and for less money, which is yielding substantially higher rates of return as the following side shows.
Source: Chesapeake Energy Investor Presentation
As that slide notes, when Chesapeake Energy invests capital in a non-operated well drilled by a company like Hess its rate of return on that well averages just 4%. However, when Chesapeake Energy invests in a well where it's the operator it earned 20% last year, with that return heading higher this year as it continues to improve. These results are why Chesapeake Energy continues to drill in the Utica Shale while smaller peers like Halcon Resources have given up and while Hess has decided to sell some of its land position.
Investor takeaway
For companies like Chesapeake Energy with lower costs, the Utica Shale really is a world-class asset. However, for others like Halcon Resources or Hess the Utica Shale is just not going to fuel returns because both have higher costs and aren't in the best parts of the basin.
What we're seeing in the Utica Shale is that location is one key but to really drive value the driller needs to know the rocks underneath its acres. By knowing the rocks and where to place and optimize wells companies like Chesapeake Energy are pushing well costs down. These are the companies that can turn the Utica into a world-class basin, while the rest just can't manage results worth their capital dollars.
I pity the folks who lease to Chesapeake. They are one of the crookedest operators out there. I had a lease with them for about 3 yrs. After about 2 yrs they decided to ignore certain elements of our contract and started withholding costs they were not supposed to. Many, many, many complaints from land owners in my area (N. Louisiana). They are still doing it. Luckily about 6 months ago my lease was bought by another company who is abiding by the lease agreement.
After I saw Chesapeake Analyst I quit reading.
Chesapeake are not a drilling company so much as a land company with pump and dump MO.
They have done it time after time.
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