Chesapeake Energy on track to be largest producer by end of '09

Chesapeake Energy has been intensifying its efforts in the Marcellus shale and is poised to take over the lead in production of natural gas coming from it. In an operations update issued at the end of the first half of '09 the company hi-lighted a couple of reasons that probably help explain why so many companies are shifting their exploration activities to the Marcellus. Assuming $7 gas and $70 oil (today's gas was $4), for Chesapeake, the Marcellus shale has the best rate of return on investment of any of their major U.S. shale plays. Its Marcellus wells have an estimated internal rate of return (IRR) of 71%. IRR is a measure often used for comparing returns on alternative investments, 71% is more than twice that for Chesapeake's Barnett shale wells. (Note: there may be some accounting wizardry involved in this very favorable calculation due to the way Chessie's funding was applied from their Statoil-Hydro Oil joint venture, but still it looks very good.) Secondly, the update noted another very favorable trend which was decline curves on their Marcellus wells that were not as steep as had been expected. Chesapeake is the second major driller reporting this same phenomenon--that is, a milder production fall-off than expected on Marcellus wells. For the latest info on Chesapeake and all the other firms active in the Marcellus shale play, please check out the open source information service, WikiMarcellus.

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Comment by Mmmarkkk on August 14, 2009 at 9:13am
Scott: I agree with Ruby. Can't figure out why you'd want verticals when horizontals are much more productive and flow at much higher rates, recover much more gas. Only reason I could see is that in PA, to get a horizontal drilled the company needs to get leases for all of the minerals they will be drilling through/under. In other states, you can get a unit formed via forced pooling that allows efficient drilling/production but also protects the interests and rights of all of the mineral rights holders. It would be nice to see PA consider something like this. Louisiana's laws are better then Oklahoma's, IMHO.
Comment by Tom Copley on August 6, 2009 at 3:16pm
Ruby-- I was a bit confused by some of the wording in the update, and was merely trying to error on side of caution, but you're probably right. 71% IRR goes a long way towards explaining why Chesapeake would risk deploying 19 rigs in the Marcellus for the balance of year. It's a bold move. Tom
Comment by scott m on August 6, 2009 at 12:56pm
Thanks for your insight, they just offered me 500 per and 15% In the Elizabeth Twp area. However, they are only doing horizontals and have few leases around me. It would be great to get someone to do a deep verticle. Any thoughts. Scott

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