Thursday, September 16, 2010

Got to Love Chesapeake!

I read the current shareholder presentation for Chesapeake Energy this morning, and I couldn't help but feel this crazy bipolar energy emanating from it.  It ranged from pandering ("The market has spoken, CHK has heard the message and the shift to liquids is well under way.") to bludgeoning ("Investment community short natural gas (in fact, hates natural gas now and forever)") to arrogant ("Do we make it look too easy?").  But the message was clear: 1) we view ourselves as the big dog, 2) we will follow the market wherever it leads us, and 3) why the HELL is our stock price so low?

I love Chesapeake because they are out front on all things natural gas (when they aren't promoting their "shift to liquids"). No other company is pushing gas like Chesapeake.  But CHK is not going to fall on the gas sword.  It has declared that it will shift to liquids, most notably oil, and oh, by the way, we started doing it two years ago.  Putting money where the mouth is, Chesapeake expects to spend 55% of its capital dollars on oil and NG liquids by 2012.  To put that in perspective, CHK spent 10% of its capex on liquids in 2009 and expects to spend 32% on liquids in 2010 (lots of lease deals, I'm sure). In the spirit of the company's new love of liquids, I've taken the liberty of changing Chesapeake's logo:

Regarding the Haynesville Shale, Chesapeake's daily net production is 615 MMcf/day and daily operated production is 920 MMcf/day.  The company will run an average of 36 rigs in the play in 2010 and drill 175 net rigs.  The company has drilled two Middle Bossier Shale wells that have been OK, but don't expect a Mid-Bossier drilling program from Chesapeake until commodity prices go much higher.   Management  thinks it will have its Haynesville acreage held by production by the end of 2011.

The big takeaway is that Chesapeake's capex spending in the Haynesville region will drop abruptly at the end of next year unless natural gas prices climb above at least $6/MMBtu.  Drilling activity and production will follow.  I think the market will applaud this move, but it will come as a shock to residents of the region.

In looking at the completion data for the past few months, one can see that Chesapeake has not adopted the restricted choke technique that is being pushed by some companies as a best practice to maximize gas recoveries (nor has CHK implied that it would).  Nearly all recent CHK completions have been on a 22/64" choke.  As a result, most initial production numbers are above 10 MMcf/day and many are in the 15-20 MMcf/day.  Very sexy numbers!  While Petrohawk has to spend lots of time jutifying the practice to investors, Chesapeake still is showing gaudy IP numbers.  It will be interesting to see if investment analysts start endorsing the restricted choke technique.  Only then might you see CHK wells coming in at 16/64" chokes (and then talking loudly about how they've been planning to do so for the past year).

Please pardon my cynicism.  I'm glad to have Chesapeake on my team, but sometimes it's just hard to watch them work.

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