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Chesapeake to spend $150M plus on unconventional U.S. gas plays
Ray Tyson Petroleum News Houston Correspondent
Independent producer Chesapeake Energy, which is now projecting double-digit production growth in 2004, is planning to spend more than $150 million this year just on unconventional gas plays in the United States.
More than $100 million of the total will be dedicated to new leasehold and over $50 million to new 3-D seismic studies, the Oklahoma City-based company said in an April 27 conference call with industry analysts.
“All the attention these days seems to have been placed on so-called unconventional resource plays,” said Aubrey McClendon, Chesapeake’s chief executive officer.
Chesapeake, primarily a U.S. Midcontinent player, has probable and possible unconventional reserves exceeding 2 trillion cubic feet of gas equivalent, he said.
“We believe our gas resource plays have much better economics than any of the other gas resource plays that we have been reading about,” McClendon said.
He said Chesapeake’s existing unconventional reserves also are “largely free” of regulatory and environmental constraints that tend to diminish resource value, such as coalbed methane, and affect project timing. Production spike from last year Chesapeake, reporting a nearly 40 percent spike in overall production in the 2004 first quarter versus the year-ago quarter, said it now expects full-year 2004 production to exceed 2003 levels by 24 percent on average.
Moreover, the company said its production in the 2004 second quarter compared to the 2003 second quarter could be 23 percent higher, while sequential growth from the 2004 first quarter to the 2004 second quarter should be at least 4.6 percent.
“We believe each of these production growth numbers reflect the quantity and quality of our drilling inventory, an inventory that has taken six years to build,” McClendon said.
Chesapeake’s production for the 2004 first quarter was a record-setting 78.9 billion cubic feet of natural gas equivalent, an increase of 22.1 bcf over the 56.8 bcf produced in the 2003 first quarter and an increase of 5.6 bcf over the 73.3 bcf produced in the 2003 fourth quarter.
During the first quarter, the company said it replaced its 78.9 bcf of equivalent production with 372.8 bcf of equivalent reserves, an astounding 473 percent increase, at a respectable drilling and acquisition cost of $1.66 per thousand cubic feet of equivalent. Of the total replacement, 146 percent came via the drill bit and 327 percent through acquisitions, Chesapeake said. No immediate plans for acquisitions Since the beginning of 2004, deal-minded Chesapeake has closed acquisitions totaling $570 million, but the company said in the conference call it has no immediate plans for additional acquisitions.
At the end of the first quarter, Chesapeake’s estimated proved reserves were 3.5 tcf of gas equivalent, the company reported.
Excluding one-time charges, Chesapeake reported net income for the 2004 first quarter of $123.4 million or 44 cents per share on revenue of $563.1 million, which beat analysts’ expectations by 6 cents per share. That compared to net income of $73.5 million or 34 cents per share on revenue of $376.3 million in the year-ago first quarter.
Aside from the good news, Chesapeake cautioned that service costs are on the rise. “We’re seeing drilling rates continue to increase,” said Marcus Rowland, Chesapeake’s chief financial officer. He said day rates for 2,000 horsepower rigs are currently running around $8,500 per day compared to $7,900 to $8,200 for comparable rigs since the first of the year, an increase of about 5 percent. New rates for 1,000 horsepower rigs have increased between $500 and $600, about a 10 percent increase, he said.
“The cost of jobs overall continues to creep up and has risen between 5 and 10 percent since the first of this year,” Rowland said.
However, steel prices have been “the big story in the last couple of months,” Rowland said, adding that surcharges from the mill have increased about 20 percent since the beginning of the year.
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