Chesapeake Energy: Benefiting From Utica And Reducing Non-Core Assets

| About: Chesapeake Energy (CHK)

The Ohio Department of Natural Resources, which reports Utica shale production data on a yearly basis, recently released its first-ever quarterly production report from this play. Oil and gas production at the Utica shale has increased significantly for the July to September quarter from the earlier production figure in 2012. The total production for this quarter was 1,332,477 barrels of oil and 33,606,075,000 cubic feet of natural gas from 285 wells in the play. The oil and gas production in the Utica shale has more than doubled in one quarter compared to all of 2012. Such a robust increase in oil and gas production augurs well for the producers in the Utica Shale.

One of these players is Chesapeake Energy (NYSE:CHK), which is the No. 1 producer in the Utica shale. This company has grown production significantly in this region. In the third quarter of 2013, Chesapeake witnessed a 91% production increase, producing 165 million cubic feet of natural gas equivalent per day. At the end of 2013, the company had 166 producing wells in the play, out of a total of 249. It is also the most active driller in the play. Besides having robust natural gas production, Chesapeake owns five of the top 10 oil-producing wells in the region.

Chesapeake is benefiting from the Utica shale's improving infrastructure. An example of the improving infrastructure is the Kensington gas processing plant, with a processing capacity of 800 million cubic feet of gas per day. This plant had its first phase completed in July last year, with 200 million cubic feet of gas processing capacity per day. The second phase was put into service last month. The plant will have a capacity to process 600 million cubic feet of gas per day, with the third phase expected to be completed in April. A fourth phase is also planned if demand for gas processing increases in the future.

Chesapeake is well positioned to benefit from the growth in the Utica shale as it holds 564 of the 1,042 drilling permits issued as of Jan. 11, 2014. Thus, out of the 24 companies that have been issued drilling permits in the region, Chesapeake holds more than half of them. The Utica shale oil and gas production in the third quarter of 2013 was valued at around $1 million per well on an average. This could result into a revenue potential of nearly $1 billion annually from similar wells. With Chesapeake having more than half the number of producing wells in the play, and also more than 50% of the drilling permits, one can safely assume that the Utica play has a revenue potential of more than $500 million for Chesapeake in 2014.

Another two companies expected to benefit greatly from the growing Utica shale production are Antero Resources (NYSE:AR) and Gulfport Energy (NASDAQ:GPOR). Both these companies are consistently drilling the strongest wells in the Utica shale. They have acreage in Monroe, Noble, and Belmont counties, which are the sweet spots in the region. Antero's wells in Monroe and Noble counties are regarded as the best producers in the region. In the third quarter of 2013, Antero's 11 wells produced 4,177,294 thousand cubic feet of natural gas and 80,240 barrels of oil on a cumulative basis. Moreover, Antero also has five of the top 10 gas-producing wells, and two of the top 10 oil-producing wells in the Utica shale.

Gulfport Energy, on the other hand, has 24 producing wells in Harrison, Belmont, and Guernsey counties. These wells together produced 6,431,070 thousand cubic feet of natural gas, coupled with 194,311 barrels of oil in the third quarter of 2013. This is an average of 267,961 thousand cubic feet of natural gas and 8,096 barrels of oil per well for Gulfport. It is a huge increase over the 5,439 barrels of oil and 137,168 thousand cubic feet of gas per well delivered by the Utica shale well on average. Additionally, the company also has the top five gas-producing wells and the top oil-producing well in the shale.

Antero's 11 wells have averaged 379,754 thousand cubic feet of natural gas in the third quarter. This is 2.77 times the average gas production from a Utica Shale well, which is a good sign for the company's prospects considering its acreage. On the other hand, in addition to having the top oil- and gas-producing wells, Gulfport has acreage in the sweetest spot of the shale. This should move the needle for the company in terms of production going forward.

Going lean

Chesapeake is working on achieving organic growth by reducing non-core assets and focusing on its core areas. To shore up its balance sheet, the company is streamlining operations and improving its focus on projects capable of producing high returns. The company has been selling off its assets for the last two years to reduce the debt on its balance sheet. Chesapeake sold assets worth roughly $3.6 billion in the first three quarters of 2013, highlighted by more than $800 million worth of asset sales in Northern Eagle Ford Shale and the Haynesville shale. Through its asset sales, Chesapeake has reduced its debt-to-EBIDTA ratio, which is shown in the table below. (One factor to consider in investing in a company is whether its debt-to-EBITDA ratio is increasing or decreasing; a declining debt-to-EBITDA ratio could indicate a company's ability to grow while reducing its reliance on debt.)


Third Quarter 2012

Third Quarter 2013

Long-term debt
($ million)



($ million)



Debt/EBITDA ratio



A further reduction in the debt-to-EBIDTA ratio can be expected for Chesapeake. It has planned to sell assets worth $600 million in the fourth quarter of 2013 and continue with the asset sale program in the first quarter of this year as well. These initiatives will help the company concentrate on its core operations.


Exploration and production companies in the Utica shale are benefiting from the infrastructure coming online in the region and removal of bottlenecks. Chesapeake is the No. 1 player in the region, and has positioned itself to benefit from this shale. Further, it is also reducing its exposure in the non-core areas through asset sales, the proceeds of which can be used to maintain capital discipline and reduce debt. Streamlining its operations will help the company in consolidating its position in its core areas.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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