Is the Utica Shale Really a World-Class Energy Asset?

Photo credit: Chesapeake Energy  

Last week at its Analyst Day Chesapeake Energy (NYSE: CHK  ) unveiled the Utica Shale as its next world-class asset. That's in stark contrast to what Halcon Resources (NYSE: HK  ) thinks about the play, as it has virtually abandoned its efforts to develop its Utica Shale acreage. It's divergent opinions like these that make it tough for investors to determine who to believe when it comes to the Utica Shale.

Chesapeake Energy's advantage
Chesapeake Energy already has a long history in the Utica Shale. It was the first company to turn a well into production in June of 2011. The competition didn't start putting wells online until nearly a year later when Hess (NYSE: HES  ) brought its first well into production that April. Being first in the basin is proving to be a real competitive advantage for Chesapeake Energy as it has drilled more wells than all of its competitors combined as the following slide shows.

Source: Chesapeake Energy Investor Presentation (Link opens a PDF

In addition to drilling more wells than all of its competitors, Chesapeake Energy has invested in getting to know the rocks beneath its acreage. The company has nearly a mile of core samples so that it can understand the reservoir flow and can optimize completions as that slide noted. Further, the company has over 600 miles of 3D seismic data which helps it understand the structure to optimize lateral placement. This data allows it to drill wells with a higher degree of certainty of success.

Knowledge yields results
This knowledge of the basin is yielding best-in-class well results. Chesapeake Energy can drill its wells faster and for less money, which is yielding substantially higher rates of return as the following side shows.

Source: Chesapeake Energy Investor Presentation 

As that slide notes, when Chesapeake Energy invests capital in a non-operated well drilled by a company like Hess its rate of return on that well averages just 4%. However, when Chesapeake Energy invests in a well where it's the operator it earned 20% last year, with that return heading higher this year as it continues to improve. These results are why Chesapeake Energy continues to drill in the Utica Shale while smaller peers like Halcon Resources have given up and while Hess has decided to sell some of its land position.

Investor takeaway
For companies like Chesapeake Energy with lower costs, the Utica Shale really is a world-class asset. However, for others like Halcon Resources or Hess the Utica Shale is just not going to fuel returns because both have higher costs and aren't in the best parts of the basin.

What we're seeing in the Utica Shale is that location is one key but to really drive value the driller needs to know the rocks underneath its acres. By knowing the rocks and where to place and optimize wells companies like Chesapeake Energy are pushing well costs down. These are the companies that can turn the Utica into a world-class basin, while the rest just can't manage results worth their capital dollars.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

Read/Post Comments (1) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 25, 2014, at 10:20 PM, bigoilbob wrote:

    If point forward completions will use Halliburton or Hughes, will they be cost effective? I'm guessing they used their own fleet in the past, at bargain basement rates. This could make the difference between that 45% ROR and buying T notes.

    Your thoughts/corrections?

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2969934, ~/Articles/ArticleHandler.aspx, 9/4/2015 12:02:07 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

Today's Market

updated 2 hours ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 4:00 PM
CHK $7.44 Up +0.06 +0.81%
Chesapeake Energy CAPS Rating: ****
HES $57.40 Down -0.11 -0.19%
Hess Corp. CAPS Rating: *****
HK $1.07 Up +0.05 +4.90%
Halcon Resources C… CAPS Rating: **