Chesapeake Share Price Down 20% From Date Of Utica Shale Disclosure

| About: Chesapeake Energy (CHK)
Despite having invested for what is now pushing two decades, some things are hard for me to learn. And one of those lessons is that there is never a rush to buy a stock that you like, because there is always a chance to get it at a better price.
Case in point Chesapeake Energy.
In late July Chesapeake announced that it had assembled a huge position in a previously undisclosed liquids resource play:

Having achieved successful results from recent drilling activities in eastern Ohio, Chesapeake is announcing the discovery of a major new liquids-rich play in the Utica Shale. 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, Chesapeake 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.

At the time of the announcement Chesapeake was trading at about $32 per share and subsequently increased to almost $35.
The subsequent increase in share price is not surprising if you consider the significance of adding an asset that is worth $15 to $20 billion. Chesapeake is a pretty large company, but even for it $20 billion is $26 per share. I’d say that should get the stock market’s attention given the share price being just higher than that.
Fast forward a couple of months and there is more good news from Chesapeake about its Utica property. Initial drilling results were disclosed, which further confirms the legitimacy of Chesapeake’s claims of the Utica being worth $20 billion.

Drilling results from the wet and dry gas phases of the play were as follows:

Chesapeake has drilled 12 horizontal wells in the discovery phase of its Utica Shale play and has achieved strong initial production success in the wet gas and dry gas phases of the play from this initial drilling. The company is early in the process of evaluating the oil phase of the play. Results from the first four of the company's completed horizontal wells in the wet gas and dry gas phases of the play are detailed below (the company's other eight drilled horizontal wells are completing or waiting on completion):

    • The Buell 10-11-5 8H in Harrison County, Ohio was drilled to a lateral length of 6,418 feet and achieved a peak rate of 9.5 million cubic feet (mmcf) per day of natural gas and 1,425 barrels (bbls) per day of natural gas liquids and oil (liquids), or 3,010 barrels of oil equivalent (boe) per day;

    • The Mangun 22-15-5 8H in Carroll County, Ohio was drilled to a lateral length of 6,231 feet and achieved a peak rate of 3.1 mmcf per day of natural gas and 1,015 bbls per day of liquids, or 1,530 boe per day;

    • The Neider 10-14-5 3H in Carroll County, Ohio was drilled to a lateral length of 4,152 feet and achieved a peak rate of 3.8 mmcf per day of natural gas and 980 bbls per day of liquids, or 1,615 boe per day; and

    • The Thompson 3H in Beaver County, Pennsylvania was drilled to a lateral length of 4,322 feet and achieved a peak rate of 6.4 mmcf per day of dry natural gas.

Prior to learning about the $26 per share Utica acreage Chesapeake’s share price was over $30 per share. Today, with the knowledge of the Utica acreage and now the initial drilling results validating the property Chesapeake’s share price is back around $27 per share.
I’m not sure, but I still think adding $26 per share in value should make the share price go up. I don’t know if it is computers, momentum trading or monkeys pressing buttons that causes share prices to move in the short term, but long-term investors should be grateful to get the chance to buy shares at lower prices.
Chesapeake has indicated that it will look for a joint venture partner to help with the huge capital spending required to develop a property the size of the Utica. Chesapeake expects to complete this joint venture by the end of 2011.
I have no doubt that joint venture will happen, and I have no doubt it will be at a price that further validates the $15 billion to $20 billion value of the Utica shale to Chesapeake. Why am I so confident? Because Chesapeake has delivered these joint ventures exactly as advertised repeatedly over the past three years.

Disclosure: I am long CHK.

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