Chesapeake investing in natural gas play as prices rise

HOUSTON – Climbing natural gas prices could help Chesapeake Energy profit off a plan to revive the nearly forgotten shale reservoir it had gambled billions of dollars on six years ago.

And the seven to nine rigs Chesapeake expects to deploy to the Haynesville Shale in Louisiana this year could boost daily rates for U.S. land drilling companies, analysts say.

The recent development is far removed from the bleak outlook on natural gas drilling in the past two years, but producers will likely be slow to follow Chesapeake’s lead, with memories of a natural gas glut and sinking prices so fresh.

“No one was talking about natural gas drilling six months ago,” said Jim Rollyson, an analyst with Raymond James.

Chesapeake had discovered a massive deposit of natural gas lodged in the Haynesville in 2008, and quickly pumped billions into acreage acquisitions and drilling operations.

The windfall was brief. Soon natural gas producers flooded the market, drowned prices and fled the deep-drilled Haynesville wells for the more accessible Marcellus Shale in Pennsylvania. And the high natural gas investment eventually caught up to Chesapeake.

Recovering price

But Chesapeake CEO Doug Lawler told investors earlier this month that recent cost improvements and recovering prices have made the reservoir a more lucrative investment, and that it could make a profit there even if gas sold for $4.50 per million British thermal units.

The U.S. benchmark price for natural gas broke $6 million British thermal units this week, but most analysts project prices will move between $3.50 and $4.50 over the next two decades. Chesapeake had just three rigs running in the Louisiana shale play by the end of last year.

“It’s an area we believe has significant growth potential,” Lawler said Feb. 6. The company’s new fleet of rigs will “drill wells we expect to be highly economic, and we’re pleased to be in a position to return some activity to the Haynesville in 2014.”

Cutting costs

Chesapeake expects it can whittle its well costs in the Haynesville down to as low as $7.9 million this year, from $10.3 million two years ago. It’s also planning to use multiwell drilling platforms called pads on all of its rigs to increase the number of wells it can clone with one rig.

The Oklahoma City-based producer’s plan would increase the number of rigs in the Haynesville by 25 percent to about 50 by the end of the year, according to an analysis by Raymond James. That’s after the rig count had flat-lined in 2013.

“I don’t think it’s going to be like the old days,” Rollyson of Raymond James said, but renewed gas drilling could drive up margins for U.S. rig contractors by spreading out demand to other regions in the country.

Analysts balk

Some analysts balked during the call. JP Morgan analyst Joseph Allman asked Lawler if Chesapeake simply did not have any better investment options in its portfolio than the Haynesville.

“No, what I am saying is that the Haynesville is a very competitive investment opportunity,” Lawler said.

The company could make a solid return on its Haynesville bet as long as natural gas prices remains higher than they did during a slump two years ago, said Jason Wangler, an analyst with Wunderlich Securities.

But it’s unclear how long Chesapeake could keep its edge if other companies also boosted the nation’s supply of natural gas.

Haynesville wells are more expensive than their counterparts in Pennsylvania, “but they have big production rates, so as soon turn as you turn one on, you’re flooded with gas,” Wangler said. “If you turn one on now, you’re going to be happy — but in the future, who knows.”