Chesapeake Energy's Hidden Haynesville Potential

The proximity to the Gulf Coast will help the Haynesville Shale regain prominence last over the last few years helping the large assets owned by Chesapeake Energy regain value.

Mar 24, 2014 at 11:49AM

With all of the discussion regarding exporting liquefied natural gas, or LNG, due to the concerns with the reliance of Europe on natural gas from Russia, Chesapeake Energy (NYSE:CHK) has a hidden asset near the Gulf Coast LNG export facilities.

Due to an abundance of domestic natural gas, the government has approved several companies for exporting natural gas, including Cheniere Energy (NYSEMKT:LNG). These facilities are coming online beginning in 2015 with the majority of the facilities open by 2018 or later. In order to export up massive amounts of natural gas, infrastructure needs to connect to gas fields and preferably close to the Gulf Coast in order to reduce transport fees and prevent the network from clogging up.

Williams Partners (NYSE:WPZ) recently announced binding commitments for proceeding with the Atlantic Sunrise Pipeline to ship gas from the Marcellus shale to the Atlantic Coast and the potential for sending gas on to the Gulf Coast. Williams Companies (NYSE:WMB) is working on the Bluegrass Pipeline along with partner Boardwalk Pipeline Partners (NYSE:BWP) to build a pipeline to ship Marcellus gas to the Gulf Coast. All of these plans sound great, but Chesapeake Energy has the potential to improve the economics of the Haynesville shale in LA and reduce or even eliminate the need to ship gas from the northeast all the way down to the coast.

Massive Haynesville asset
Chesapeake has the largest acreage in the Haynesville shale, located in a geologic formation in the North LA. Salt Basin in northern LA and eastern TX. The natural gas is located between 10,500 and 13,500 feet below the surface and covers an area of approximately 9,000 square miles. Chesapeake estimates that the play has technically recoverable resources of 251 Tcf.

Chesapeake's position in the Haynesville shale is industry-leading at 570,000 gross acres. It currently operates around 700 producing wells and plans to average operating around eight rigs for 2014. The company has an inventory of approximately 4,500 wells based on 80 acre spacing. The key, though, is the expected reduction in drilling costs for a well from over $10 million back in 2012 to around $8 million in 2014. Combined with sufficient pipeline and takeaway capacity already in place, the shale might finally have some advantages over the more prolific Marcellus shale.

Increased natural gas usage
Starting in 2015, Cheniere Energy will begin exporting natural gas in the form of LNG from the Sabine Pass in LA. The project will start with two LNG trains capable of processing 1 Bcf/d by 2016 and finish with six LNG trains capable of processing 3 Bcf /d when the project is completed in 2018. In addition, other chemical plants and export facilities are scheduled for construction along the Gulf Coast in the next few years that will dramatically increase the demand for natural gas.

The Haynesville shale is in an advantageous position with the proximity to the LA coast, but the other prolific shale plays also have numerous infrastructure problems. Williams Companies and Williams Partners won't finish the Bluegrass and Atlantic Sunshine pipelines until 2017 or 2018, providing limited ability to even ship natural gas from the Marcellus shale to fulfill the growing demands of the Gulf Coast.

Bottom line
With all of the moving parts in the natural gas sector, one can't always be sure what will happen in the next couple of years. One certainty is that natural gas demand around the Gulf Coast is set to surge due to exports and manufacturing facilities under construction, leaving producers from the Haynesville shale positioned to prosper from the increase in demand. Chesapeake Energy is the best positioned producer in that region, and the company is starting to increase drilling in order to situate itself for the growing demand.

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Mark Holder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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