Founded in 1989, Chesapeake Energy (CHK) has grown to become the second largest producer of natural gas and one of the most active drillers of new wells in the U.S. Chesapeake competes with other oil and gas producers like Exxon (XOM), ConocoPhillips (COP), Anadarko (APC), BP (BP) and Chevron (CVX). Chesapeake owns interests in around 44,100 producing natural gas and oil wells that are currently producing around 2.4 billion cubic feet equivalent (bcfe), 93% of which is natural gas.
Chesapeake’s main strategy remains to develop its "Big 6" natural gas shale plays – Barnett, Haynesville, Bossier, Fayetteville, Marcellus, and the Eagle Ford Shale, which account for more than 50% of its total proved natural gas reserves of around 13.5 trillion cubic feet, as of end of fiscal 2009. As per 3Q 2010 data, Chespeake is the second largest producer of natural gas in the U.S., producing 2,748 mmcf/day. This compares to 2,234 mmcf/day for Anadarko, 2,190 mmcf/day for BP, and 1,820 for Conoco Phillips. ExxonMobil is the largest producer with 3,726 mmcf/day.
We estimate that natural gas production accounts for around 75% of our near $25 price estimate for Chesapeake’s stock, which is around 17% below the current market price.
In a recent deal, Chesapeake sold a stake in its rich U.S. shale oil and gas assets to Cnooc (CEO) for $570 million in cash. In addition to this, Cnooc will finance roughly two-thirds of Chesapeake’s share of drilling and other costs up to $697 million. Chesapeake believes that this deal will help to provide the necessary capital to accelerate drilling of its large domestic oil and natural gas reserves. [1]
(Chart created by using Trefis' app)
We believe that such deals can help to accelerate Chesapeake’s production from its reserves. Natural gas production volume increased from around 420 mcf in 2005 to 835 mcf in 2009, largely to support the growing demand between 2005 and 2008. However, as a consequence of the economic downturn, which reduced demand and prices significantly in 2009, we expect the volumes to decrease slightly in the short term and then increase, crossing 900 mcf by the end of the Trefis forecast period.
However, if it increases at a faster rate and reaches around 1,000 mcf by the end of our forecast period, it would mean an upside of around 15% to our current price estimate for Chesapeake’s stock.
(Slideshow created by using Trefis Pro app)
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Disclosure: No positions
