Why Are Chesapeake Energy’s Production Costs Falling?

Chesapeake Energy has made several changes in order to improve its operations, but are they paying off?

Jun 17, 2014 at 3:50PM

The elevated price of natural gas has improved the bottom line for oil and gas producer Chesapeake Energy (NYSE:CHK). But the rising price of natural gas has eclipsed the company's steady improvement in its operations. In order to demonstrate the shift in efficiency, let's take a closer look at two of the company's top assets, which account for nearly a quarter of its production: the Haynesville and Eagle Ford shales.

Fewer wells
Chesapeake Energy showed a sharp improvement in the present value of its oil and gas revenue (PV-10). Eighty-five percent of its wells were profitable in the first quarter of 2014 compared to only 46% back in 2012. This improvement was partly due to reduced costs and a shift from less profitable wells to more lucrative opportunities. Furthermore, the company lowered the number of completed wells; case in point, in the first quarter of 2014, it completed 234 wells compared to 274 wells in the same quarter last year and 1,388 during 2013. The company plans to reach 1,200 this year.

In order to reduce costs, the company has updated its asset-divestment program, which includes the sale of non-core assets in Southwestern Oklahoma, East Texas, and South Texas. But besides selling assets, Chesapeake Energy has also shifted its operations toward more profitable assets.

Haynesville shale
This region is less profitable than other regions, as it primarily produces natural gas. In recent months, the recovery of natural gas has made this region's output more profitable, but over the long run, the company is expected to cut its production in this region. In the first quarter alone, Chesapeake slashed this region's production by 41% to 495 million cubic feet of natural gas equivalent, year over year. Here is a way to demonstrate why the Haynesville shale is less profitable than other regions:

Chk Eagle Ford

Source: Chesapeake Energy's website (opens pdf)

The chart above compares the average well cost (in millions) of the Eagle Ford shale and the Haynesville shale.

As you can see, the Eagle Ford region offers much lower costs. Moreover, the Eagle Ford shale has a big portion in oil operations, which are likely to be more profitable over the long run.

Other natural gas producers have also backed out from the Haynesville shale region: According to the Energy Information Administration, Haynesville's number of rigs dropped to around 50 in 2014 -- back in 2010 it was close to 250 rigs. Furthermore, natural gas production has also declined in recent years. 

Eagle Ford shale
This region has been heating up in the past several years as more oil producers have entered the location, including Devon Energy (NYSE:DVN). Back in February, the company closed a $6 billion deal to purchase acreage in the Eagle Ford from GeoSouthern. Some analysts estimate the Eagle Ford's production could rise to 2 million barrels per day by 2020 -- currently the production is around 1.4 million barrels per day.

As stated earlier, this region holds not only natural gas but also oil. For Chesapeake Energy's Eagle Ford shale operations, oil production accounts for 64% of the mix, while natural gas holds only 21% in this mix. The rest (15%) is NGL, or natural gas liquids.

Despite the total decline in the number of completed wells, as presented earlier, the company has increased the number of producing wells in the Eagle Ford shale from 650 in the first quarter of last year to 945 wells by the end of March -- a 45% spike. Furthermore, the Eagle Ford's net production averaged approximately 88,000 barrels of oil equivalent per day compared to 75,000 boe per day -- a 17% rise year over year. Adjusting for Chesapeake Energy's asset sales, its production grew by 26% in this region.

In order to further increase this growing and lucrative region, the company plans to allocate 39% of its capital expenditures toward expanding its operations in this region. In comparison, Chesapeake Energy will allocate only 8% of its capex to the Haynesville shale.

In conclusion...
Chesapeake Energy has made changes in its asset portfolio and plans to further increase its production in more profitable regions such as the Eagle Ford shale. These steps will keep improve the company's bottom line even if oil and natural gas prices change direction and start to drop.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Lior Cohen has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy. 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