Chesapeake Energy Spends Less to Produce More Oil & Gas

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Chesapeake Energy Corporation (NYSE:CHK) (Oklahoma City, Oklahoma), one of the largest U.S. independent oil and gas producers, is spending less money to produce more crude oil, natural gas and natural gas liquids (NGLs). Chesapeake is primarily a gas producer, and continued soft gas prices have forced the company to cut planned capital expenditures twice in the last six months: to between $3.5 billion to $4 billion this year, compared with $6.7 billion in 2014 and $7.8 billion in 2013.

But like its brethren producers, Chesapeake's production continues to grow as it uses capital efficiencies and improved drilling techniques to coax more hydrocarbons out of formations while lowering costs. Consultancy IHS Incorporated (NYSE:IHS) (Englewood, Colorado) recently estimated Chesapeake's drilling and completion operations in the Utica Shale to be 40% more efficient than its nearest competitor.

Speaking on a recent first-quarter earnings call, Chesapeake executives forecast a 25% rate of return at an average natural gas price of $3.25 per thousand cubic feet (Mcf) and an average crude oil price of $65 per barrel. Any price recovery in those commodities will flow straight to the company's bottom line.

Cost reductions and production gains characterize other areas where Chesapeake operates, including the Eagle Ford Shale, Powder River Basin, Niobrara Shale, Haynesville Shale and Marcellus Shale. Overall drilling costs have fallen by an estimated 40% as the company applies new knowledge about hydraulic fracturing techniques to new fields, helping keep Chesapeake profitable in the face of low commodity prices. In its first-quarter earnings release, issued May 6, the company said its average production cost fell to $4.84 per barrel of oil equivalent (boe), down 5% from fourth-quarter 2014 results. General and administrative (G&A) costs, including stock-based compensation, fell 34% to $0.91 per boe, compared with fourth-quarter 2014 results.

For the just-completed quarter, Chesapeake told investors it produced an average of 686,000 barrels of oil equivalent per day (boe/d), a 14% increase over year-earlier results, adjusted for asset sales. Crude-oil production increased 17% to 121,900 barrels per day (BBL/d) during the quarter, while gas production increased 12% to 2.9 billion cubic feet per day (Bcf/d). Production of natural gas liquids (NGLs) increased 19% during the first quarter to 75,800 BBL/d. All of those production figures are adjusted to reflect the billions of dollars of assets Chesapeake sold in 2014. On a full year basis, company officials predicted 2015 production would average 640,000 to 650,000 boe/d.

Commenting on Chesapeake's first-quarter results, Doug Lawler, the company's chief executive, said: "Chesapeake is meeting the challenge of low commodity prices head-on and delivered a very strong first quarter. Adjusted for asset sales, our production in the 2015 first quarter grew by 14%, compared to the 2014 first quarter. Our cash costs remain at industry-low levels, and we expect our assets to continue delivering greater efficiencies, even as we reduce our activity levels throughout 2015. ... The capital efficiencies we are seeing in each of our operating areas are helping to strengthen (our) cash flow. During this challenging commodity price environment, our talented employees and high-quality assets are delivering competitive, differential performance."

Successful down spacing tests in the Eagle Ford Shale allowed the company to add an additional 600 to 700 locations there, the company said in its quarterly earnings release. Crude oil production in the Eagle Ford Shale rose to an average of 113,000 boe/d, a 7% increase over fourth-quarter 2014 results. Chesapeake reported full-year 2014 average well-completion costs of $5.9 million, about $1 million less than what it spent there in 2013 to complete an average well. Chesapeake is continuing its cost-reduction efforts in the Eagle Ford, and it said it expected well-completion costs to fall to an average of $5.5 million by the end of 2015.

In the Marcellus Shale, gas production averaged 832 million cubic feet per day (MMCF/d) during the first quarter, a 2% gain over fourth-quarter 2014 results. For all of 2014, the company shaved about $400,000 off the average cost to complete a well there, to an average of about $7.5 million, compared with $7.9 million in 2013. The company told investors it planned to reduce gas production in the Marcellus by about 500 MMCF/d during the second quarter in an effort to lift prices.

Another area where Chesapeake operates, the Haynesville Shale, saw production gains and cost reductions. The company produced an average of 616 MMCF/d there during the first quarter, a 4% gain over fourth-quarter production. Chesapeake lowered its full-year 2014 average well-completion costs there to $8.4 million, from $8.9 million in 2013.

Chesapeake has staked its claim to fame in the Utica Shale in eastern Ohio, where it is the largest operator. First-quarter production there averaged 110,000 boe/d, a 10% gain over fourth-quarter results. But as the company is drilling longer laterals there with more fracturing stages, its costs are rising. In 2014, the company spent an average of $7.2 million to complete a well with average lateral length of 6,200 feet and 29 fracturing stages. By contrast, in 2013 the company spent an average of $6.7 million to complete a well with average lateral length of 5,150 feet and 17 fracturing stages. For 2015, the company told investors it anticipated spending an average of $8.2 million to complete a well in the Utica. Those wells will have average lateral lengths of 7,900 feet and 41 fracturing stages.

Utica Targeted for Expansion
Continued low natural gas prices will force the company to reduce the number of rigs it operates in the Utica Shale, Chesapeake officials said earlier this month. The company's rig count there will fall to two by the middle of the third quarter, down from five in the first quarter, according to the Akron Beacon Journal. Similar reductions are being made in other areas, notably the Eagle Ford Shale, the newspaper reported. But Chesapeake, believing it will eventually figure out that region's geology and its production economics, reportedly is looking to acquire new acreage in the Utica.

Earlier this year, before it reported first-quarter results, Chesapeake said it planned to spend about 25% of its drilling & completion (D&C) budget in the Utica this year, up sharply from 10% in 2014. The company also plans to increase the share of D&C budget going to the Haynesville Shale, to 13% this year from 8% last year. In the Eagle Ford, Chesapeake plans to spend about 35% of its D&C outlays there this year, down from 40% last year, the company said February 25.

"Oil and gas production is all about gaining mastery of reservoir economics and production techniques, and deploying that knowledge to increase future production and lower costs," said Jesus Davis, Industrial Info's vice president of research for the North American Oil & Gas Production, Pipelines and Terminals industries. "Like other industry leaders, Chesapeake is finding ways to lower costs and increase production of oil, gas and NGLs during a period of relatively low prices. When demand drives prices higher, we can expect Chesapeake will reap sizable benefits."

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