Chesapeake Energy (CHK) is one of the largest independent exploration and production companies in the United States. We consider Chesapeake to be the most innovative large cap E&P company on the planet. The company is based in Oklahoma City, Oklahoma and has a market cap of $15.75 billion.
Last year Chesapeake had total revenue of $9.5 billion and was the second largest producer of U.S. natural gas and a top 15 producer of U.S. liquids. The company is the #1 driller in the world of horizontal wells and the most active driller in the U.S. with 166 operated rigs and 105 non-operated rigs currently working. CHK is an innovative force in the E&P arena. In just the past four years, CHK has discovered five of America’s best unconventional plays, i.e., Granite Wash, Mississippian Lime, Haynesville Shale, Tonkawa Tight Sand and the Utica Shale. Equally important, CHK is also innovative on the financial side as they are a leader in asset monetization and have the best hedging track record in the industry.
The breadth of Chesapeake’s footprint is breathtaking as they control 14.5 million net acres of U.S. onshore leasehold acreage. The company has leading positions in 12 of the top 15 unconventional liquids-rich plays in the U.S. Chesapeake is #1 in the Anadarko Basin (including Granite Wash, Cleveland, Tonkawa and the Mississippian Lime plays), #1 in the Utica Shale, #2 in the Eagle Ford Shale, #3 in the Niobrara Shale, top 5 in the Permian Basin and top 10 in the Williston Basin. CHK also has dominant positions in four of the top five U.S. natural gas shale plays (having sold out of the Fayetteville Shale), i.e., #1 in the Marcellus Shale, #1 in the Haynesville Shale, #1 in the Bossier Shale and #2 in the Barnette Shale.
Besides being innovative, CHK is also consistent. The company has provided 21 consecutive years of sequential production growth. Last year production growth was 14%. So far in 2011 production growth is up a further 9%.
One asset that Chesapeake has that you will not find listed on their balance sheet is their CEO and Chairman (and some might say cheerleader) Aubrey K McClendon. We have long been a fan of McClendon’s enthusiasm, knowledge and dedication to his job. Listening to Aubrey McClendon talk about Chesapeake makes you want to immediately phone in a market order to buy. The company makes a compelling case that now is the time to get bullish on natural gas and the company based on their calculations that the net asset value of Chesapeake with NYMEX natural gas at $5.00 and oil at $99.15/barrel is $91.63/share. Even with NYMEX natural gas at $4.00 the company feels their NAV would be $65.23 per share.
Our immediate interest in Chesapeake is their Ohio Utica Shale discovery and related acreage which was announced to the public on July 28, 2011 as part of their 2011 2nd quarter earnings release. As part of the announcement, CHK said, “based on its proprietary geoscientific, petrophysical and engineering research during the past two years and the results of six horizontal and nine vertical wells, it has drilled, CHK believes that its industry leading 1.25 million net leasehold acres in the Utica Shale play could be worth $15-20 billion in increased value to the company.” Chesapeake believes the Utica Shale will be characterized by a western oil phase, a central wet gas phase and an eastern dry phase. They think the Utica Shale will be economically superior to the Eagle Ford Shale in South Texas.
Although Chesapeake did not make their Utica Shale announcement until July 28, 2011, they started acquiring their Ohio Utica acreage in mid-2010 and now have amassed 1.25 million net acres of leasehold acres which is by far the largest position in the industry.
Currently, Chesapeake is drilling in the Utica Shale with five operated rigs to further evaluate and develop its leasehold and anticipates increasing its rig count to eight by the end of 2011 and reaching at least 16-20 rigs by year-end 2012. CHK believes its leasehold position In the Utica will support a drilling effort of at least 40 rigs by year-end 2014.
On September 28th Chesapeake disclosed the initial horizontal well drilling results from the first four horizontal wells drilled in the wet and dry gas phases of the Utica Shale play in Eastern Ohio and Western Pennsylvania. The three wells in the wet gas phase averaged 2,051 barrels of oil equivalent and the Pennsylvania dry gas well achieved a peak rate of 6.4 mmcf per day of dry natural gas. We await the results of their initial evaluation of the oil phase of the play
CHK is now in the process of conducting a competitive process to monetize a portion of its Utica Shale leasehold position. The company anticipates completing a Utica Shale transaction prior to year end.
Chesapeake CEO Aubrey McClendon stated last month that he believes that the Utica Shale will be a transformative event not just for Ohio but for the entire country. McClendon is very excited about the entire Utica play and thinks ultimately 25,000 wells may be drilled I the Utica over two decades representing a $200 billion investment. Listening to Aubrey McClendon, it is clear his excitement is palpable. We feel the participation and sponsorship of the Utica Shale oil play by Chesapeake makes the Utica Shale oil play both credible and “investible” even at this early stage.