Chesapeake Energy Is Finally Drilling Wells That Add Value

Chesapeake Energy has shifted from drilling wells to hold acreage to drilling wells that add to the value of the company.

Jun 3, 2014 at 5:10PM

Chesapeake Energy (NYSE:CHK) has undergone an important strategic shift over the past two years. It has gone from drilling a majority of wells that actually were negative to the value of its reserves, or its PV-10 value to drilling wells that are indeed positive to its PV-10 value. This is a trend that should see the company begin to maximize the value of its assets, instead of working hard just to keep as many assets as it could afford to drill.

No longer drill, baby, drill
Just two years ago Chesapeake Energy drilled 54% of its wells just to hold acreage by production despite the fact that these wells were actually a net negative to its PV-10 value. However, with that drilling largely in the past, the company can focus on drilling wells that add value. As the following slide shows, 85% of the wells Chesapeake Energy drilled in the first quarter were actually accretive to its PV-10 value.

Chesapeake Energy Hbp Shift

Source: Chesapeake Energy Investor Presentation (link opens a PDF).

As that slide noted, the company continues to drill more wells that are accretive to the value of the company than those drilled just so it doesn't lose acreage. It's a big shift that can help a company like Chesapeake Energy exceed expectations in the quarter, whereas a peer focused on keeping acreage, like Kodiak Oil & Gas (NYSE:KOG), can disappoint.

In the case of Kodiak Oil & Gas, it blamed the rough winter weather for wrecking its first-quarter results as well as knocking it off course from hitting its full-year guidance. However, the real reason the company disappointed investors was because of its focus on drilling weaker acreage just so it could be held by production. Kodiak Oil & Gas CEO Lynn Peterson noted that:

During the first quarter of 2014, nearly a third of our completed operated wells were drilled in our Wildrose area of northern Williams County to hold acreage. This is an area with a thinner reservoir section and less source rock that results in lower reservoir pressures and less gain, and corresponding lower production rates and reserves.

What Kodiak Oil & Gas experienced in the first quarter used to be the story at Chesapeake Energy. However, the company can now instead focus nearly all of its attention on its best acreage.

The end results
Because it can focus on optimizing its drilling, Chesapeake Energy will be able to drill 90% of its wells on pads this year. That's up from 70% in 2012 and is akin to drilling the same number of wells with one fewer rig working. At the same time, the company can also focus on drilling longer laterals, which it is drilling faster than ever. Here, the company is drilling the same number of wells, but saving the equivalent of more than six rigs, as the following slide shows.

Chesapeake Energy Opperational Effeciencies

Source: Chesapeake Energy Investor Presentation.

The numbers are pretty staggering as Chesapeake Energy's drilling efficiency program alone saved the company $470 million in the first quarter of this year compared to 2013.

Meanwhile, Chesapeake Energy continues to focus on getting better at drilling its wells. Another example of this is improved geosteering, which is enabling 94% of its laterals to be drilled in the target zone versus 87% two years ago. That might not sound like a lot of improvement, but as the following slide shows, it is having an impact.

Chesapeake Energy Geosteering

Source: Chesapeake Energy Investor Presentation.

This focus adds an incremental 26 million barrels of oil equivalent to the company's reserves each year, which can add an annualized $330 million to the company's PV-10 value.

Investor takeaway
Chesapeake Energy is finally able to focus most of its attention on drilling wells that add value instead of drilling just to drill, a strategy that is having a profound impact on Kodiak Oil & Gas. This focus is enabling Chesapeake Energy to invest to drill the best wells as well as invest in the technology needed to make these wells even better. The move is a real big positive for its investors. 

Do you know this energy tax "loophole"?
You already know record oil and natural production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Matt DiLallo 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers