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Back in February, Chesapeake Energy (NYSE: CHK ) started shifting its strategy. The natural gas heavyweight would focus more heavily on liquids-rich resources -- plays like the Eagle Ford and Niobrara, which yield high amounts of oil or natural gas liquids.
In a move that should surprise absolutely no one, Chesapeake spent around $2.9 billion on land acquisitions in the first half of the year, in an attempt to lock up key leaseholds in emerging "oily" plays. It's said that to a man with a hammer, everything looks like a nail. Well, CEO Aubrey McClendon started his career as a landman, so what can you expect?
This recent expenditure moderately outpaces what Chesapeake spent on leasehold in the first half of 2008, when gas prices were booming and the company was touting the Haynesville shale as the most important thing ever.
As noted in Chesapeake's strategy update back in May, the company has now secured a leading position in a dozen liquids-rich plays. (Twelve are disclosed, with more in stealth mode). We're looking at 2.4 million net acres of leasehold, which nearly equals Chesapeake's net shale acreage. The firm's estimate of risked resource potential in these oily plays is 3 billion barrels of oil equivalent.
Relative to the potential, you can argue that Chesapeake hasn't shelled out that much money. This will be all the more true after the firm snags a few joint venture partners to help defray those up-front acquisition costs. In the shales, Chesapeake turned $2 billion of leasehold acquisition costs into $10 billion. We'll probably see something similar play out in the Eagle Ford, the Niobrara, and other oily plays we haven't even heard about yet.
Chesapeake is naturally shifting its drilling budget in favor of these plays as well, given the pricing chasm between oil and natural gas. Despite its significant joint venture commitments with partners like Statoil (NYSE: STO ) in the Marcellus and Total (NYSE: TOT ) in the Barnett, Chesapeake expects to be spending more on its oily plays in 2012 than on its gas plays.
The company is getting a late start relative to EOG Resources (NYSE: EOG ) , but it's aiming for 25% liquids production by 2015. That's up from just 10% of the production mix today.
Meanwhile, Chesapeake says that once its leasehold is held by production, it's going to step gas drilling down significantly, until we see $6-per-million-BTU prices take hold. That's a very different tack than the one taken by Encana (NYSE: ECA ) , which is going full blast on its path to doubling production, regardless of prices. I have to favor Chesapeake's approach here.