Can Chesapeake Pull a Turnaround?
Anirban is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Time changes and with time the factors playing in the economy also change. And for survival one has to adapt well to these changes. Just at a time when the world was betting high on the idea of the acquisition of Chesapeake (NYSE: CHK), in a turn of fortunes the company has drilled the highest oil producing well in the company’s 23-year history.
The Ray of Hope:
In a significant new discovery in the Hogshooter play in the Anadarko Basin, the Thurman Horn 406H well had an average daily production of 5,400 barrels (bbls) of oil, 1,200 bbls of natural gas liquids (NGL) and 4.6 million cubic feet of natural gas (mmcf) for the first 8 days of production. According to analysts, this is a very significant number at a place where even an initial production of 2,000 bbls per day is an outstanding achievement. The company has already drilled another 3 wells in the area, with one well already into stabilized production and the other two nearing completion. The company has an 88% stake in all the four wells.
Chesapeake has acreage of 30,000 net acres in the Hogshooter play and plans to develop another 65 wells in its acreage. Apache (NYSE: APA) was one of the pioneer drillers in the Hogshooter play, and their success got Chesapeake hopeful of the potential of the area. If the company is successful in its planned drillings, it can script a turnaround not only in its own fortunes, but also for the whole US oil and natural gas industry.
Behind the scene:
Chesapeake, the second highest natural gas producer in the US after Exxon (NYSE: XOM), has taken a blow in the form of the decreasing natural gas prices followed by a steep increase in production of natural gas with the advent of new drilling technology. This severely affected the cash flow of the firm and now the firm is reeling under a lot of pressure to repay its debt and is mulling the idea of selling $20.5 billion in assets to fill in the shortfall in the cash flow. The good news is that Chesapeake has already factored in the expense related to the drilling in the Anadarako Basin in its capital expenditure and hence there will be no increase in spending.
Since January, 2012 Chesapeake lost 30% of its market value and a takeover bid by biggies like Exxon and Chevron (NYSE: CVX) to get a hold of the most lucrative onshore shale plays, were always on the cards. All these led to a shift in focus from gas to more profitable oil for Chesapeake. And this discovery comes at such a crucial point of time when Chesapeake needed it the most. A few more drills like this and the company would be out of the slump.
Though, I would like to throw a word of caution here. Some companies, like Forest Oil (NYSE: FST) have drilled wells at the Hogshooter play in the past but only had unsatisfactory results regarding production. So, Chesapeake has to be careful about drilling in the area as drilling incurs cost and the company is in no position to waste cash.
The Bottom line:
The way Chesapeake used to identify places to drill out gas in the past was very successful, but can the company do the same in the case of oil? Can the company successfully drill new wells with a satisfactory outcome in the Hogshooter play? Only time will tell. Keep a close watch on the stock.
anirbandutta has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.