Where Chesapeake Energy Corporation Sees Opportunity in 2014

Despite a sharply reduced capital budget for 2014, Chesapeake Energy expects to deliver 8%-10% adjusted production growth this year.

Feb 24, 2014 at 12:00PM

2013 was a truly transformational year for Chesapeake Energy (NYSE:CHK), as the nation's second-largest producer of natural gas made commendable progress in reigning in spending and delivering profitable and efficient growth from its existing asset base. As it aims to continue improving its financial health and boosting production, let's take a closer look at where the company sees opportunity in 2014.

Chesapeake's plans for 2014
In 2014, Chesapeake expects to spend $5.2-$5.6 billion, down 20% from the midpoint of the company's 2013 capital expenditures guidance. Despite this sharp reduction in spending, however, it expects to deliver 8%-10% year-over-year production growth this year after adjusting for 2013 asset sales and 2%-4% production growth on an absolute basis.

Once again, the largest portion of Chesapeake's 2014 E&P capex, about 35%, will go toward the Eagle Ford shale -- the company's key driver of oil production growth -- while the rest will be divided up between the Midcontinent (20%), the Utica shale (15%), and the northern Marcellus shale (10%).

Eagle Ford
In the third quarter, Chesapeake's net production from the Eagle Ford surged 82% year over year to average roughly 95,000 barrels of oil equivalent (boe) per day. At the same time, the company's spud-to-spud cycle times in the Eagle Ford have fallen from 29 days in 2011 to 18 currently, while well costs have plunged from $10.1 million per well in 2011 to $6.9 million, thanks largely to an aggressive shift toward pad drilling.

Other operators have also sharply reduced their well costs through greater use of pad drilling, including Continental Resources (NYSE:CLR), Kodiak Oil & Gas (NYSE:KOG), EOG Resources (NYSE:EOG), and Hess (NYSE:HES). Continental now spends around $8 million per well in the Bakken, down from an average of $9.2 million in 2012, while Kodiak has slashed its Bakken well costs to $9.7 million-$10.2 million per well, down from roughly $11 million per well in 2012.

Similarly, EOG is now spending about $5.8 million per Eagle Ford well, down from $9.1 million in 2009, while Hess has brought its Bakken well costs down from $9 million per well in the fourth quarter of 2012 to around $7.6 million currently. Greater use of pad drilling was the main driver behind all these companies' sharp reductions in well costs.

Anadarko, Utica, and Marcellus
The next biggest portion of Chesapeake's 2014 E&P capital budget -- about 20% -- will be devoted to Midcontinent drilling, which encompasses the Mississippian Lime, Cleveland, Tonkawa, Granite Wash, Hogshooter, and other plays in the Greater Anadarko Basin. Third-quarter production from these plays averaged 109,000 boe per day, up 12% year over year, though down 14% sequentially largely because of the sale of producing assets in the Mississippi Lime.

Next, Chesapeake expects to allocate roughly 15% of this year's E&P capital budget to the Utica shale and 10% to the northern Marcellus shale. The Utica will be crucial is helping the company meet its target of 44%-49% natural gas liquids production growth, while the Marcellus will be the biggest contributor to expected gas production growth of 4%-6%.  

Northern Marcellus production averaged 825 million cubic feet of natural gas equivalent (mmcfe) per day in the third quarter, up 53% year over year, while Utica production averaged approximately 164 mmcfe per day, up 91% year over year. Crucially, both plays will benefit tremendously from the improvement in gas processing and pipeline takeaway capacity this year. Lastly, the remaining 20% of Chesapeake's E&P capex will be divided up between the Haynesville shale, the PRB Niobrara, the southern Marcellus, and the Barnett shale.

The bottom line
As you can see, Chesapeake's oil production growth this year will be led mainly by the Eagle Ford and Greater Anadarko Basin plays, while dry gas and gas liquids growth will be fueled by the northern Marcellus and Utica shale, respectively. Over the past year, the company has made solid progress in delivering on its two main objectives -- funding the majority of its capital program with operating cash flow and improving its financial position by reducing debt.

Despite this progress, however, I see limited upside for shares of Chesapeake this year -- especially after the phenomenal 60% surge last year -- as the markets digest the implications of the company's weaker-than-expected production forecast. Longer term, though, I think the company remains a buy, given its improving fundamentals and tremendous upside optionality to a recovery in natural gas prices.

Chesapeake isn't the only company benefiting from the record oil and natural gas production that's revolutionizing the United States' energy position. That's why the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Arjun Sreekumar owns shares of Chesapeake Energy. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers