This is a summary of the second quarter fiscal 2008 earnings call conducted by Chesapeake Energy Corp. (CHK) on August 1, 2008.
Management:
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Chairman of the Board, CEOfficer: Aubrey K. McClendon
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CFO, Executive VP: Marcus C. Rowland
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COO, Executive VP Operations: Steven C. Dixon
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Executive VP Exploration: J. Mark Lester
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Senior VP Investor Relations and Research: Jeffrey L. Mobley
Key Investor Issues:
- Chesapeake posted a quarterly loss of $1.65 billion, or $3.17 a share versus net income of $492 million, or $1.01 a share, a year ago.
- Excluding one-time items, Chesapeake earned $479 million, or 89 cents a share in the quarter, up 40% from a year ago.
- Revenue from second-quarter gas sales rose to $2.23 billion from $1.2 billion.
- Natural-gas production averaged the equivalent of 2.33 billion cubic feet a day, up 25% from 1.87 billion last year.
Second Quarter Highlights:
Chesapeake is now producing about 45 million cubic feet of natural gas per day on a gross basis from its first 11 horizontal wells. The first well has been on about 300 days and is on a 9/64 choke and is making about 700 MCF per day. It was a five-stage frac job in a short lateral. For 10 months Chesapeake has kept it on a 9/64 choke so that it can obtain more consistent rate and pressure information on this constant choke over time.
Four wells are short lateral re-entries, one of which is also only making 700 MCF per day because of a mechanical problem with the fish down hole.
The other three have been online an average of four months and are producing around 3 million per day each through 14/64 or 16/64 chokes, for the same reason as the first well. The next four wells have been online an average of two months and are producing an average of 4 million a day from six-stage completion wells.
The final two wells are producing on 24/64 chokes and are making a combined 20 million cubic feet of gas per day.
One of these last two wells is the only well Chesapeake has completed using eight stages in its completion techniques and this well is making 14 million cubic feet of gas per day after its first week, the best shale well the company has ever drilled among the more than 2,000 it has been involved in. After just 11 wells Chesapeake is able to bring in wells making 14 million cubic feet of gas per day. The learning curve in every other shale play has taken dozens if not hundreds of wells and there is no other shale well in any other shale play that has averaged more than 9 million per day during the first several weeks.
From here on all of wells will be long laterals with at least eight completion stages and Chesapeake will likely produce them on 24/64 chokes rather than the smaller chokes the company completed its first wells on. This will greatly increase the likelihood of completing wells that will begin producing at 10 million cubic feet of gas per day or even better.
The Haynesville is over pressure and as a result, the Haynesville wells have a real advantage as the compression cost can be avoided for years as the reservoir pressure will exceed line pressure.
Another very positive attribute of the Haynesville will be its superior gas price compared to the Barnett, Woodford, and Fayetteville. In July the Haynesville well head gas price exceeded Barnett well head gas price by about $1.50 per MCFE. This month with gas prices about $4.00 lower, it will still be about $1.35 higher than in the Barnett.
On average every square mile of Core and Tier 1 Haynesville Shale contains an average of 180 BCF gas in place.
This is based on an average formation thickness of 220 feet across this 3 million acres, original formation pressure of almost 10,000 pounds per square inch, and porosity, permeability, and water saturation measurements. From that gas in place Chesapeake will recover about a 52 BCF per square mile through the drilling of eight wells per square mile. This would result in per well average recoveries of about 29% of the gas in place, which is consistent with expected Barnett recoveries although Barnett drilling is 50% more dense than planned Haynesville drilling. This is a smaller recovery factor than expected from the Woodford and Fayetteville.
With about 3 million acres in the Blob, there’s roughly 4,700 square miles in the Haynesville.
At 52 BCF of recoverable gas per square mile, that equals about 2.45 BCF of recoverable gas in the Haynesville, exactly consistent with what Chesapeake had predicted from the beginning. So rather than this number being hype, it is instead an entirely reasonable number based on thorough scientific examination reinforced by actual drilling results to date. These are reasonable early estimates of the total resource that Chesapeake and others plan to produce over time.
Natural constraints to the play’s growth:
The play will require decades to fully develop and since much of the play includes leases that have been held by production for as many as 50 years, many companies will take a very methodical approach to developing their Haynesville assets.
The shale is found at about 11,500 feet deep on average and takes rigs that must have at least a 1,000 hp engine, 600,000 pound rates mass, 1,600 hp triplex pumps, and top drive. There are not many spare rigs with these capabilities so the availability of rigs will be the second serious impediment to the play’s production ramp up.
