Comparing Large Oil And Gas Names Working U.S. Land Plays, Part II

by: Michael Filloon

<< Part One

In the second part of this series, I will cover large oil and gas companies operating in U.S. land plays. Large companies generally have large blocks of land. This is done for several reasons. The first is infrastructure. It is cheaper to run pipeline to get liquids in and out of well sites. Transportation costs are significant and can drag a company's net profit. Water lines can run to the well, while natural gas and oil can be sent out. To further decrease these costs, mobile water purification units are brought to the well to purify the water on location to be re-used at nearby locations. Having control of a large block of land also allows for pad drilling. Pad drilling decreases drilling time and frac times as it reduces transportation of drilling rigs, and allows for zipper fracs.

Chesapeake (NYSE:CHK) has built a large position in U.S. liquids plays. Although this company has been criticized for paying too much, it still has an impressive inventory. Chesapeake has over 5.5 million acres in unconventional liquids assets. This equates to over 13700 net drilling locations. Chesapeake is the number two producer of natural gas and the thirteenth largest liquids producer in the United States. Most important is its growth in liquids production which increased by 62.4% when the second quarter of 2010 is compared to the same quarter in 2011.

Chesapeake is the self proclaimed number one horizontal shale well driller in the world. It controls 15% of all drilling information in the United States. Chesapeake has 169 operated and 105 non-operated rigs in U.S. land plays. In the Anadarko Basin, it has 2035000 net acres, which is the number one position in this play. Although we hear more about the Williston and Permian Basin, this area is a top notch play. Chesapeake has had a very large number of good well results in the Anadarko. These three wells are from three separate resource areas in the Anadarko:

  1. Tonkawa (Lauder 1-11H): IP rate of 1760 Boe/d
  2. Cleveland (Arlen 1-19H): IP rate of 1600 Boe/d
  3. Mississippi Lime (Parr 1-25H): IP rate of 770 Boe/d

Included in Chesapeake's Anadarko acreage is the Granite Wash. The Granite Wash has a very good production rate. This area has significant liquids content, while well costs have been low ($5 to $7 million) considering this production. Chesapeake has given the results from two of its wells here:

  1. Colony Granite Wash (HX4 LLC 1-14H): IP rate of 3580 Boe/d
  2. TX PH Granite Wash (Schweke 1-33H): IP rate of 3480 Boe/d

There has been a lot of interest in Chesapeake's 1.25 million acres in the Utica shale. This accounts for 40% of the total drillable acreage in the Utica. It currently has five rigs in this play and plans to increase to ten by year end. Approximately 75% of its 1.25 million acres are in the wet gas and oil windows of this play. Chesapeake has completed 12 wells in this play, and disclosed results from 4 of those wells.

  1. Buell 10-11-5 8H: IP rate of 3010 Boe/d
  2. Mangun 22-15-5 8H: IP rate of 1530 Boe/d
  3. Neider 10-14-5 3H: IP rate of 1615 Boe/d
  4. Thompson 3H: IP 6.4 mmcf/d of dry gas

The best well by far is in Harrison County which is split down the middle by the wet gas and oil windows of the Utica. Just north is Carrol County which produced the second and third wells above. These were very good results also, but the Buell well result is excellent in my opinion. I will be interested to see what the 30 and 60 day IP rates will be. At that time, there may be an EUR for locations in these counties.

Chesapeake has 835000 net acres in the Permian Basin. This includes areas like the Wolfcamp and Wolfberry. This basin has significant upside as a proven play in primary and enhanced oil recovery. In the past I highlighted the Permian with emphasis on the Wolfcamp. Chesapeake has not announced any attempt to find a JV, even though this acreage could generate significant cash to add to its Williston Basin acreage. Three Chesapeake well results in the Permian are:

  1. Bone Spring (Monroe 1-10 1H): IP rate of 2200 Boe/d
  2. Avalon Shale (PLU Big Sinks 22 Fed. 1H): IP rate of 1160 Boe/d
  3. Wolfcamp (University 5-26 1): IP rate 523 Boe/d

Other companies with large interests in the Permian are:

  • Pioneer Natural Resources (NYSE:PXD): 50% of its proved reserves are in Spraberry, with interests in 5600 wells.
  • Devon (NYSE:DVN): Has approximately one million acres in the Permian with 160000 of those net acres in the Wolfberry.
  • Sandridge (NYSE:SD): Has approximately 250000 net acres in the Permian
  • Whiting (NYSE:WLL): Is levered to the Bakken shale, but bought into the Permian for $491/acre. It has approximately 85000 acres here.

This is just a few of the companies working this play. For a more complete list see the article linked above.

Chesapeake has 595000 net acres in the Powder River and DJ Basin. This company stole some headlines in the DJ Basin by paying a substantial sum for part of Samson's (NYSEMKT:SSN) acreage. I first wrote about this on January of this year. Chesapeake paid $74 million for 24000 acres. Opinions on this sale were initially negative until it announced a JV with CNOOC (NYSE:CEO). All parties benefited from the transaction, but Samson got a very good deal. Estimates had total oil recovery between 10.1 to 109 million bbls. net to Samson. There are several other players working the Niobrara. Noble (NYSE:NBL) has over 800000 acres.

Chesapeake has 460000 net acres in the Eagle Ford. It has a JV with CNOOC. CNOOC paid $10650/acre for 33.3% of Chesapeake's total Eagle Ford acreage. The Eagle Ford is a very interesting play. Like the Permian, much of this can have 20 to 40 acre spacing. Chesapeake's Gates 010-CHK-A TR3-2H had an IP rate of 2285 Boe/d. Other players in the Eagle Ford are:

  1. EOG Resources (NYSE:EOG) has over 600000 net acres. EOG placed emphasis here, over other great plays such as the Williston Basin.
  2. SM Energy (NYSE:SM) has 250000 net acres in the Eagle Ford. It recently divested some of this acreage for cash to fund its accelerated development.
  3. Abraxas (NASDAQ:AXAS) is an interesting and very small company with 12000 gross acres. Its T-Bird 1H in DeWitt County has an EUR of 1100 MBoe. In 180 days it produced 230000 Boe.

Although Chesapeake has not been specific as to its Williston Basin locations, it has approximately 320000 net acres. It currently has three well permits in Stark County. This is in the general vicinity of GMX Resources' (GMXR) Little Knife acreage. The reason for Chesapeake's interest in this portion of the Bakken / Three Forks hydrocarbon system is best described by Whiting, as it has stated there is a much thicker Three Forks pay zone in the Lewis & Clark when compared to the middle Bakken. This area seems to have had very good results near the Bakken pinch out. Wells near Chesapeake's acreage are:

  1. Froehlich 44-9TFH: IP rate of 2090 Boe/d
  2. Kubas 11-13TFH: IP rate of 1953 Boe/d
  3. Hecker #21-18TFH: IP rate of 3612 Boe/d
  4. Debrecen #1-3H: IP rate of 1667 Boe/d

The first three wells of this list are from the Three Forks. The fourth well looks to be a middle Bakken well, but it is still on the confidential list. Either way, I like the prospects of both pay zones. Currently, Chesapeake has three wells permitted with two still drilling. These three wells are all in Wildcat Field:

  1. Schoch 21-37-97 A 1H
  2. Zent 30-138-95 A 1H
  3. Decker 26-138-97 A 1H

In summary, I believe that Chesapeake gives a very good look at liquids development in the United States. I would like to see Chesapeake continue to divest some of its natural gas plays, and use the cash to ramp its liquids plays development. It could also unlock value if it were to divest its oil service and midstream assets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This is the second part of a series on large oil and gas producers working U.S. land plays. This is not a buy recommendation.