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Why is Chesapeake increasing its focus on liquids-rich plays?

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Commodity prices

Oil and natural gas liquids have, in the last few years, commanded better prices compared to natural gas.

Given that CHK is one of the biggest players in natural gas production, it will benefit from an increased focus on NGL production. Accordingly, the company expects to achieve 44%–49% natural gas liquids production growth in 2014. Liquids-driven production growth, along with operational efficiency, is the main objective for CHK in 2014.

Let’s take a deeper look at which areas CHK will focus on to meet this objective.

Chesapeake’s “Liquids-rich” focus

The Eagle Ford

The Eagle Ford is one of the significant liquids-rich plays in America. CHK is directing approximately 35% of its capex into this region in 2014. According to company reports, Eagle Ford wells have an ROR (rate of return) of 45%.

Mid-Continent

Chesapeake has significant acreage positions in the Mississippi Lime and the Granite Wash plays of the Mid-Continent region.

Production mix is biased towards natural gas (47%), but Chesapeake is focusing on oil as well (33%).

The company aims to reduce well costs in this region by 20% by the end of 2014. It believes that, for every 10% decrease in well costs, its drillable inventory will increase by more than 100 wells.

Utica

Chesapeake produced 67,000 BOE/d in 2Q 2014 from the Utica region. This is a 373% year-over-year increase. For context, the company was targeting to achieve 300% year-over-year growth from the Utica with an increased focus on liquids.

For 2014, CHK management has provided guidance for Utica production at ~110,000 boe/d. Of this total, approximately 50% consists of liquids.

Utica wells have an ROR of 45%, as per company reports. The Utica will likely play a crucial role in helping CHK meet its target of 44%–49% natural gas liquids production growth.

Marcellus

The Marcellus region remains a gas-only producing region for Chesapeake. The focus in this region is to increase operational efficiency by reducing well costs. The company reports that year-to-date well costs are already below the 2014 estimated average.

CHK plans to increase its natural gas production by 4%–6% in 2014. The Marcellus region will likely be the biggest contributor to achieve this goal.

Well cost reductions via pad drilling

CHK is gradually shifting to pad drilling. This shift reduces the percentage of wells drilled using single-well pads. This has helped bring down the company’s well costs significantly.

Other producers that have taken to pad drilling to reduce well costs include EOG Resources (EOG), Hess Corp. (HES), Continental Resources (CLR), and Kodiak Oil & Gas (KOG). All these companies are components of the Energy Select Sector SPDR ETF (XLE).

Performance

The following part of this series discusses how CHK and its business segments performed in the latest quarter.

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