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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Replies to This Discussion

Very interesting.....

 

Could it be that the oil window requires more infrastructure to be produced (which means time) and they need CASH now, so staying in wet gas area is more productive?

 

Or is it just another ploy to deter other companies from offering better top leases?

 

,,,,,,,,,,,,,,,,,,,,,,the world may never know.

Paul, on the main part of this page, someone posted this exact article, which is where I got it.  If you scroll through, there is observation that Chevron is positioning itself to make a major purchase.  The author speculates CHK or Anadarko.  Chevron is an oil producer and not interested in gas.  Definitely something to watch, but only speculation at this point.  The strange thing is both state and federal governments claim to KNOW there's an abundance of oil under our  eastern OH. So the science is there?  Maybe you're right that it's too expensive to extract for some companies...

JR...I saw the article....

 

Early on in this play it was speculated that once "proven"  the big oil producers  (Exxon,BP,Shell.Chevron) would swoop in and buy out the leases held by the early/smaller gas companies.....

 

I think any buyout of leases from CHK by an oil producer is a good thing.

1. it validates the value of the leases ...they aren't speculating

2. they are more apt to produce than CHK  in a more timely manner.

 

I still believe in the end Tusc. County will prove to be part of the "sweet spot" in terms of producing revenue.....which we are really interested in as landowners.

Jr,
I believe the biggest hole in you observation is that you have faith in the state and federal governments assessments...

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