Tuesday, August 3, 2010

Chesapeake: We're True Believers, But We Are Also Pragmatists

Chesapeake Energy, "America's Champion of Natural Gas" made it clear to investment analysts in its second quarter earnings and operations report that is also loves liquids.  (The company used the word "liquid" 47 times in its press release, versus 55 times for "natural gas.")

The company announced that by year end 2015 it expects 25% of the company's production to be in liquids.  To achieve this shift, Chesapeake is going to allocate an increasing amount of capital expenditures to liquids rich plays. In 2009, the company spent 90% of its capex funds in natural gas plays, versus 10% for liquids plays.  The company's projected 2012 capital budget will shift that ratio to 45% gas/55% liquids.  Chesapeake stated that its total capital budget for 2011 will not change much from 2010, except the gas play budget will shrink by $400 million and the liquid plays budget will increase by that same amount.

Quite a change America's Champion of Natural Gas.

But this is not a big surprise.  Chesapeake is nothing if not clever.  Most investment analysts are penalizing gas-centric companies, so it's only natural for smart folks like those at Chesapeake to"liquefy" themselves.  But the bigger picture is that this shift is a recognition that the traditional ratio of gas and oil prices likely has been broken.    For the past couple of years, many folks have been pointing to the disparity between oil and gas prices versus historical norms.   The gap is going to close!  Something has to give! Looking back and squinting to look forward, it seems as though it was the historical ratio that gave.

In terms of Chesapeake's Haynesville activities, the company says that it has 530,000 net acres in the play, 195,000 of which are prospective for the Mid-Bossier Shale.  In the month of July, Haynesville production averaged 615 MMcf/day.  The company is operating 35 rigs in the play and expects to drill 175 wells by year-end 2010. Based on its current level of activity, Chesapeake expects to have the "vast majority" of its Haynesville leasehold held by production by year-end 2011.  The company noted one completion that has not been previously reported:
  • Wren 10-13-13 H #1, Chesapeake Operating:  21.6 MMcf/day IP; Holly Field, DeSoto Parish, S10/T13/R13; res. A, serial #240353

While it hurts my feelings a little bit that liquids are the hot new topic and places like the Eagle Ford and Niobrara (WY/CO) Shales are getting all the attention these days, it probably bodes well for the Haynesville Shale.  As producers focus more on oil and NG liquids, it should keep a lid on excess natural gas production in the short-term and help moderate the supply/demand problem created by shale gas on one hand and the devastating recession on the other.  It certainly won't help boost lease bonus prices, but it might give natural gas prices a breather.

I believe that there are many signals pointing in favor of natural gas in the long run.  Taking the spotlight off gas for a little while ultimately should be a benefit.

3 comments:

Bill Mendenhall said...

I agree completely Robert with your last comment. The producers have been victims of their own success. In order for prices to recover, the market must see a slowdown in production. By focusing attention on liquids, CHK is helping themselves and the industry in multiple ways.

Anonymous said...

Thanks for this great site. Much appreciation.

Are you aware if CHK and all these other liquids dreamers are hedging their future NGL production, as if all these liquids production plans come to fruition, I'm not sure there's a great deal of hope for ethane and propane pricing over the next couple of years.

Thanks in advance.

Robert Hutchinson said...

Anonymous:

You've brought up a very interesting point.

I'm not sure what the hedging scheme is for the NGLs. For CHK, actual production of the liquids in any substantial quantity is still a year or two off, so there likely isn't a hedging program at the company for liquids yet. If and when there is, you can bet that CHK will do something interesting! It may not be right (although it certainly might be), but it will be something to behold given the company's aggressive and clever track record.

Long-term, it will be interesting to see what happens in the NGL market. I doubt the market is nearly as liquid (in a financial sense) as gas or oil, and it's not just a single product. The Kuwaitis seem to be selling a boat load of it (LNG pun unintended), but that's a different market altogether.

Petrohawk, which has a jump on CHK in the "liquids rich" Eagle Ford Shale doesn't mention hedging NGL's in its hedging update (http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzkxODk4fENoaWxkSUQ9Mzk2MTY3fFR5cGU9MQ==&t=1)

I certainly will keep an eye on this.