Chesapeake Sees Dimming Oil Prospects in Ohio

y DANIEL GILBERT

Chesapeake Energy Corp.'s CHK +0.93% prospects of coaxing crude oil from Ohio's rust belt have dimmed, the company's chief executive said Tuesday, though he maintained the region remains key to the natural-gas giant's future.

Chesapeake, the country's second-biggest gas producer after Exxon Mobil Corp.,XOM -0.97% is seeking to transform itself into a major producer of oil, which is more profitable than natural gas. The Oklahoma City-based company has nearly doubled its oil output in the last year, with the biggest increase coming from its holdings in South Texas.

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AUBREY MCCLENDON

In Ohio, Chesapeake executives had expressed optimism about producing oil from the Utica Shale, a deeply buried layer of petroleum-rich rock. Chesapeake owns drilling rights to 1.2 million acres in the Utica, and roughly a third of them lie in a zone it has described as rich in oil, though the company has focused its drilling in an area known to yield wet natural gases, like ethane and propane.

Aubrey McClendon, Chesapeake's co-founder and CEO, said in May he was confident the company would report good results from oil production.

But on Tuesday, he said the Utica was unlikely to drive a major increase in its oil production. It is not a place "where we are going to probably see a huge amount of oil production growth," Mr. McClendon said at an investor conference. "And to the extent the oil works, it will be with some other companies."

Still, Mr. McClendon said the company is pleased with its results in the Utica, calling it "one of our foundational plays for decades to come."

A Chesapeake spokesman said Tuesday, "For the time being, we are pleased to let other companies commit their capital to the oil window" of the Utica.

Analysts said they weren't surprised by Mr. McClendon's assessment, noting the company's focus on producing wet gas, which is more profitable than regular "dry" gas. A surge in natural-gas production from shale, led by Chesapeake and its rivals, has glutted the market and caused prices to collapse earlier this year to depths not seen in more than a decade.

In response, Chesapeake has spent heavily to acquire drilling rights to areas where it could extract higher-margin fuels, including large swaths of Colorado and the border between Kansas and Oklahoma. But prices for natural-gas liquids have also been dented recently by overproduction.

When oil's share of production declines, profits suffer, said Tim Rezvan, an analyst at Sterne Agee. But he pointed out that Chesapeake, and other companies like Gulfport Energy Corp. GPOR -2.37% have reported prolific volumes of both wet and dry natural gas in the Utica. "The numbers are just staggering," he said.

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Permalink Reply by Bluflame on November 15, 2012 at 9:51am

J-O,

   Be careful! Trying to re-draw that line cost the state geologist his job! (Of course, neglecting to run the new line up the ODNR totem pole likely contributed!)

BluFlame

Permalink Reply by JR on November 14, 2012 at 2:39am

This pretty much concurs with Devon's assessment and BCC's comments about Anadarko.  You have to remember too, there's a lot of low-hanging fruit with the wet gas window.  

Permalink Reply by Joseph-Ohio on November 14, 2012 at 2:47am

It's basically common knowledge that Chesapeake is selling it's so-called 'non-core area acreage' in Ohio as it has been charged by the SEC of being over-extended.

This may be a marketing ploy - that is to say it could give CHK more time to get well (by developing it's wet gas Utica wells first as they have said they would).   If they don't end up selling their 'non-core area acreage' afterall (by discouraging would be buyers) they may be able to hang on to their 'cheap' leaseholds in the Utica and develop them later.  If they end up selling them they make money anyway.

Marketing strategy ?  

What can you believe ?

Ohio Geological Survey says it's there.

CHK apparently is now saying that someone else would have to harvest it.

Business types are shrewd people.

What can you believe ?

 

Permalink Reply by Billy Park Whyde on November 14, 2012 at 4:10am

  CHK sold UTICA  oil areas and never diminished the value of those leases in the selling of them. We  now see oil prices down to  $85/bbl . With the poker game in such large numbers it is hard to tell who is bluffing and who has the ace in the hole. 

  Just like in all prospecting the more people looking the higher the chances are in finding what they are looking for and more of it. There is gold in Ohio , it has been found, and is still being found by hobbyist gold prospectors in Ohio. Several claims are in Ohio set up by a prospecting club in case you didn't know. 

  If you have a stream upon your land or are located in a area of Ohio that has had gold discovered I would urge you to play with the idea of allowing a gold prospecting club to check it out for you or do it yourself as a family outdoor recreation project.

 Yellow gold jewelry instead of black gold looks better  upon a wearer, lol.

Permalink Reply by David Mohn on November 14, 2012 at 11:30am

Well if CHK is disappointed in the Utica, my question would be "why build an eastern CHK campus in Stark County?  They have 189 acres of land and plans are for a 5 story office building, railroad tracks leading into the land and area marked off for storage of pipes and equipment then later on more office building.  All starting early next year.  Must be something here for them to build a home away from home.  They didn't build offices in any other plays that I know of.  Just a thought.  Maybe they are just after wet gas?  Who knows.   Mr McClendon did not get where he is today by sharing information and walking away from a dollar. 

Permalink Reply by JR on November 14, 2012 at 11:34am
The article says they're concentrated on NGLs/wet gas and they're happy with those results. It basically says the oil window isn't worth their investment.
Permalink Reply by Billy Park Whyde on November 14, 2012 at 11:48am

So they say subject t

Permalink Reply by george m. on November 14, 2012 at 5:00pm

ngls are nice but they won't pay off the way crude will.

Chemical plants can only use so much ngl's so the price of ethane / propane will continue to drop.

Unfortunately, Utica does not compare favorably with the Eagle Ford or the Bakken shales right now.

 

Permalink Reply by Joseph-Ohio on November 14, 2012 at 10:52pm
My take:

The SEC is not allowing CHK to borrow the funds it would need to develop more wells and won't until they satisfy the SEC's concerns pertaining to their asset to liability ratio and investment behavior.

In other words the SEC has pulled the plug on more development by CHK (for now).

I'd bet that CHK would develop more wells if the SEC backed off their case.

Would like to see healthier developers step up to the plate and keep the ball rolling.

Domestic energy development is key to our domestic recovery.

Subsidizing financially healthier developers (not to mention more conversion to natural gas) would greatly assist in getting back on track.
Permalink Reply by gary SWF on November 15, 2012 at 1:20am

Is one of the big boys warming up in the bullpin????

Chevron's Shelf Registration Could Signal Acquisition

11-14-2012

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In a research note published today, Oppenheimer speculates that a recent shelf registration by Chevron (NYSE: CVX[FREE Stock Trend Analysis]) could be a signal the company is ready to make a large acquisition. Due to slowing oil production and a cash hoard that is the industry's largest at $22 billion, Chevron is no stranger to acquisition speculation.

"With $22 billion in cash, the largest in the industry--double its debt and 10% of its market value—we are intrigued by the company's recent shelf registration, which leads us to think that CVX may be prepared to make a large acquisition of a highly leveraged company and needs the additional cash to wipe out this high cost debt," said Oppenheimer in the note.

The shelf registration does not say exactly how much debt Chevron could sell. Nor does it explicitly say the proceeds from bond sales will be used to fund acquisitions. What is obvious, however, is that Chevron's strong balance sheet combined with a favorable interest rate environment mean the company potentially go after a leveraged rival and erase the target's debt at low rates.

Chevron's third-quarter output slid due to a refinery outage in California and the loss of production due to legal woes in Brazil. At this juncture, Chevron does not know for certain when it will be able to operate in Brazil again. With the specter of losing access to South America's second-largest oil market and declining production in other markets, the California-based company may feel compelled to pull the trigger on a large purchase. However, the pool of legitimate candidates is rather slim.

No GasAs Oppenheimer notes, "Chevron has the highest exposure to crude oil prices as well as the highest unit profit among its peers of major oil companies." Oil production is more profitable than natural gas production and with Chevron already benefiting from its reduced gas exposure relative to a rival such as Exxon Mobil, there is no need for the former to bolster its gas position.

Following comments from CEO Aubrey McClendon that Chesapeake Energy (NYSE: CHK) will not be able to pull as much oil from the Utica Shale in Ohio as previously thought, that controversial company is suddenly less alluring as an outright takeover target. Chesapeake, the second-largest U.S. natural gas producer behind Exxon, has been working to boost oil production and the Utica Shale was seen as essential to that plan. Utica still offers plenty of gas opportunities, but that is not what Chevron or any other U.S.-based acquirer will be looking for.

To that end, any other gas-rich independent such as Cabot Oil & Gas (NYSE: COG) and Range Resources (NYSE: RRC) can likely be taken off Chevron's shopping list as well. Chevron recently purchased 246,000 Permian Basin acres from Chesapeake, so it may not see the need to acquire the company outright.

Make A SplashChevron, often admired by peers for its prudence, does not necessarily need to make a splash when it comes acquisitions. The second-largest U.S. oil company has made two new major gas discoveries at crown jewel Gorgon Field in Australia over the past several years. The company also announced new discoveries in Africa. Africa may be a high-risk destination to Western oil producers, but it is also viewed as one of the last great frontiers of untapped oil reserves.

However, with $22 billion cash, Chevron has double the cash that it has debt. That enviable cash position implies the company can take some chances when it comes to acquisitions. The shelf registration implies Chevron might be willing to take on a bride with a less than pristine financial situation.

Enter Anadarko Petroleum (NYSE: APC). The second-largest U.S. independent oil and natural gas producer has been mentioned as a possible target for Exxon. One analyst has speculated the takeover price for Anadarko could be as high as $52 billion. If Exxon and its $18 billion in cash could move on Anadarko, so could Chevron with $22 billion in cash.

Last month, Bloomberg reported Anadarko's reserve replacement ratio last year was 148 percent compared to just 107 percent for Exxon. The company had total reserves of 2.5 billion barrels at the end of 2011 and is targeting 3 billion by the end of 2014.

Like Chevron, Anadarko is a major operator in Africa. The company holds a 36.5 percent in a Mozambique gas field that could be worth an added $20 to the stock price, Barron's reported. Anadarko also has significant footprints in the Eagle Ford and Niobrara shales, two of the oilier shale formations.

Texas-based Anadarko is not perfect, though. The company's ongoing $25 billion lawsuit with Tronox pertaining to environmental liabilities could keep potential suitors at bay and a recent SEC filing shows the company has no loss-liability contingency for the case.

Chevron's own legal woes in Brazil and Ecuador could stretch the bounds of its willingness to take on Anadarko. However, if Chevron does use the shelf registration to pay down any Tronox liabilities for Anadarko and if the latter does not need an acquisition offer north of $50 billion, this marriage is a possibility. Those are two big "if's" though.

Permalink Reply by Joseph-Ohio on November 15, 2012 at 2:20am

Excerpted From Above:

"Following comments from CEO Aubrey McClendon that Chesapeake Energy (NYSE: CHK) will not be able to pull as much oil from the Utica Shale in Ohio as previously thought, that controversial company is suddenly less alluring as an outright takeover target. Chesapeake, the second-largest U.S. natural gas producer behind Exxon, has been working to boost oil production and the Utica Shale was seen as essential to that plan. Utica still offers plenty of gas opportunities, but that is not what Chevron or any other U.S.-based acquirer will be looking for."

I think it's a quantum leap to say that CHK "is suddenly less alluring" because CHK "will not be able to pull as much oil from the Utica Shale in Ohio as previously thought".

Because the SEC won't let CHK borrow more which should enable more Utica tight oil development; doesn't automatically mean that the oil (that Chevron is after) isn't there, and that Chevron may choose to acquire CHK's Utica Leasehold Acreage and develop it themselves.

Gotta keep an eye on this one.  

Permalink Reply by Joseph-Ohio on November 15, 2012 at 5:34am

http://marcellusdrilling.com/2012/11/enervest-ceo-contradicts-mccle...

Go to this link for a Marcellus Drilling News entry that contradicts the CHK statements (which some are seeming to interpret as negative to the entire western Utica regions - as opposed to negative as pertaining to only CHK involvement).

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