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Chesapeake Energy Is Realizing That Its Best Well Isn’t Necessarily Its Next Well

Chesapeake Energy (NYSE: CHK  ) has focused a lot of its efforts lately on becoming a much more efficiently run organization. It's using pad drilling to cut down drilling days, which is saving it money on each well it drills. While the company could put those savings toward drilling another well elsewhere, it's seeing greater returns by reinvesting it in that very same well.

Take a look at the following slide from a recent Chesapeake Energy investor presentation.

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

As that slide notes, Chesapeake Energy is using pad drilling efficiencies, well design optimization, and new tools and technologies to cut a million dollars from its northern Marcellus well costs. But instead of taking that money and using it toward drilling its next well, the company is choosing to reinvest it in that very same well on an enhanced completion design. It's finding that the incremental return on that capital is money very well spent as it's earning a 55% rate of return on that reinvested capital. Just as important, the enhanced design is keeping its production flat instead of allowing the natural decline rate to take over after a few months.

Chesapeake Energy is seeing the same thing in the Utica Shale. In becoming a more efficient driller in the play, including lopping off nine drilling days over the past two years, Chesapeake Energy is slashing $2 million off its base well costs. But as the following slide shows, it sees greater value in reinvesting most of those savings back into each well.

Source: Chesapeake Energy Investor Presentation

As that slide points out the company is taking $1.4 million dollars from its efficiency savings and reinvesting it in that same well. This reinvestment is turning out to be money well spent for Chesapeake Energy as it's earning an 80% rate of return as the completion optimization is really improving the economics of each well as this next slide points out.

Source: Chesapeake Energy Investor Presentation 

As that slide notes, last year Chesapeake Energy saw a 20% rate of return on the capital it spent on each Utica Shale well. But by reinvesting some of its savings the company is able to boost its rate of return to a much more robust 45% this year. This is a prime example of how spending money can indeed make more money.

Investor takeaway
Chesapeake Energy knows that cutting costs is only part of the solution. It still needs to drill wells that earn high rates of return. What the company is seeing is that in many cases the money it saves on a well isn't best spent on drilling its next well, but instead is best being reinvested in that very same well. 

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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:

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8/27/2015 4:00 PM
CHK $7.02 Up +0.68 +10.73%
Chesapeake Energy CAPS Rating: ****