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Higher rig rates coming Chesapeake hedges bet with $20 million stake in drilling company Petroleum News Houston Staff
Lower 48 natural gas producer Chesapeake Energy believes it has caught wind of what exploration and production independents always fear: escalating operating costs.
To cover its bets, the U.S. Midcontinent producer announced in early April that it had taken a $20 million equity stake in Texas-based Pioneer Drilling, primarily as a hedge against what it sees as higher rates for U.S. land rigs down the road.
Specifically, Chesapeake said it bought 5.3 million shares of Pioneer Drilling stock, giving the Oklahoma-based independent a 24.6 percent stake in the growth-minded drilling company and its current fleet of 24 land rigs.
Both Chesapeake and Pioneer said they believe U.S. rig demand and day rates for land rigs will increase once jitters over Iraq and the economy subside. Rigs count up 10 percent In fact, the number of rigs searching for oil and gas in the United States rose by 10 to 972 during the week ending April 4, rig monitor Baker Hughes reported. That compares to 738 rigs a year ago when commodity prices were at a low point in the cycle. And land rigs were leading the charge, rising by 14 to 856 compared to 842 a week earlier and 613 a year earlier.
Even the struggling Gulf of Mexico rig market, while down by one at 97 compared to 107 a year ago, is beginning to show signs of life, Deutsche Bank Securities concluded in a report to investors. The investment bank said that while still volatile, “offshore permits and plan filings have been trending upward since the first of the year.” Deutsche Bank also noted that filings in early April reached their highest level in nearly 20 months.
Two new rigs Pioneer said it would use some of the proceeds from Chesapeake’s investment to pay for two additional rigs, with the remainder going to pay off a $6 million loan and for future opportunities.
“Their confidence in our future has positioned us to strengthen our balance sheet and be better capitalized for future growth opportunities,” Pioneer CEO Michael E. Little said.
In the late 1990s, when commodity prices and rig demand were on the upswing, Chesapeake bought into drilling company Bayard Drilling. The company eventually cashed in its 40 percent share when major Nabors Industries acquired Bayard and its 87 rigs.
Chesapeake has grown rapidly through several key acquisitions, including its recent $500 million purchase of Midcontinent gas assets from El Paso. That deal added 67,000 million cubic of gas equivalent per day to Chesapeake’s production, while bolstering proved reserves by 328 billion cubic feet of gas equivalent and probable and possible reserves by 70 bcf of gas equivalent.
A top-ten independent natural gas producer in the United States, Chesapeake said the El Paso transaction pushed its total proved reserves to 2.75 trillion cubic feet of gas equivalent and overall production to 640,000 million cubic feet of gas equivalent per day.
Chesapeake, among the most active land drillers in the United States, maintains a fleet of 32 rigs, six of which are owned by the company and used exclusively for drilling in the Midcontinent, Chesapeake’s core producing area. And while Pioneer’s rigs work primarily in East and South Texas, Chesapeake likely could negotiate a deal with Pioneer for additional Midcontinent rigs if needed, the company indicated.
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