Chesapeake Energy Corp.'s Eagle Ford Shale leasehold, now is the top producer within the company, delivering year/year growth in 4Q2012 of 266% and sequential growth of 20%, the independent reported Thursday. Net production in the South Texas play averaged 62,500 boe/d, with 66% of it oil, while 19% was natural gas and 15% liquids.
The Oklahoma City-based producer has been transitioning from gas to oil, and its strategy appeared to pay off in South Texas. Chesapeake had to write down about $2 billion in 2012 for the value of its assets, mostly related to a decline in value for Haynesville and Barnett properties, which at this point aren't worth producing until prices strengthen.
Long-time followers of Chesapeake may have been jarred by the absence of co-founder and CEO Aubrey McClendon, whose oft-times bombastic style and obvious enthusiasm for the onshore portfolio could be counted on keep everyone awake during conference calls. He had presided over about 80 of them. Thursday was the first in the company's history in which he was absent, from both the press release and on the call; his retirement is set for April 1 (see Shale Daily, Jan. 31). The board on Wednesday also said there appeared to be no intentional wrongdoing regarding any of his controversial financial transactions (see Shale Daily, Feb. 21).
McClendon wasn't there, but he was fondly recalled in a preview to the earnings conference call by investor relations chief Jeff Mobley, who conveyed a message of praise for the departing chief on behalf of the company. McClendon's "visionary" leadership and abilities, which helped to create the No. 2 natural gas producer in the country, were touted. And the workforce was given a nod for its dedication and loyalty during a particularly rocky time.
Chesapeake's COO Steve Dixon, who was joined in the call by CFO Domenic J. Dell'Osso Jr., waxed enthusiastically about the company's future, and especially about the strength of four unconventional plays -- the Eagle Ford, Utica and Marcellus shales, as well as the Mississippian Lime formation.
No production results were more impressive than those in the Eagle Ford, where 534 gross wells were producing at the end of the year, with 405 reaching first production last year, including 98 in the last quarter.
"The Eagle Ford Shale once again was the growth engine for liquids production," Dixon told analysts during the conference. For the year oil output jumped 314% from 2011, up 38,500 b/d, and it was 19% sequentially higher from the third to the fourth quarter of 2012.
"Eighty-two percent of the liquids mix in the play is oil," Dixon said. Chesapeake is forecasting a 2013 exit rate from the Eagle Ford of 70,000 b/d, which would translate into 40% year/year growth.
Seventeen rigs today are in operation, well below a peak of 34 in April 2012, but the lower count has had no impact on the output, he said. Drilling efficiencies and reduced well costs have more than made up the difference, and only 16 rigs on average are planned this year.
Spud-to-spud cycle times substantially declined in the final three months from a year earlier, to 18 days versus 26 days. Fewer wells are to be drilled this year but the "planned number of wells turned-to-sales will be roughly equal in both years."
Of the 98 wells that ramped up in 4Q2012, 92% (90) had peak production rates of more than 500 boe/d including 27 wells with peak rates of more than 1,000 boe/d. Three South Texas wells in particular stood out: Hahn Dew 1H in DeWitt County achieved a peak rate of 1,985 boe/d; Flat Creek Unit A Dim 2H in Dimmit County peaked at 1,470 boe/d, and JJ Henry IX M 1H in McMullen County peaked at 1,275 boe/d.
Delineating the prospective Utica Shale is taking time, an issue that other producers have noted. Dixon said the drilling outlook for Chesapeake's one million net leasehold, which is spread across eastern Ohio, Pennsylvania and West Virginia, has been difficult to pin down because the play is so "variable" -- oily in some areas, more gassy in others. The producer, like its peers, also has been awaiting needed infrastructure to determine what the wells can do.
Last year Chesapeake drilled 184 wells in the Utica, including 45 producers, 47 waiting on pipeline connection and 92 wells in various stages of completion. Fourteen rigs now are in operation, a number expected to hold this year.
"Production growth from the Utica is expected to accelerate during 2013 when two new third-party natural gas processing complexes will enable the company to turn a large portion of its well inventory to sales," Dixon said.
In 4Q2012 Chesapeake's Utica efforts were showcased in three notable Ohio wells. The Houyouse 15-13-5 1H in Carroll County peaked at a rate of 1,730 boe/d, while another well in the same county, the Walters 30-12-5 8H achieved a peak rate of 1,140 boe/d. In Jefferson County, the Cain South 16-12-4 8H produced at a peak of 1,540 boe/d.
One thing that's helping pay for drilling costs in the Utica is a drilling and completion (D&C) carry from joint venture partner Total E&P USA, which at the end of 2012 was $1.15 billion. All of the remaining carry is expected to be used by the end of 2014, which over the time period would pay for about 60% of Chesapeake's D&C costs in the play.
The Marcellus Shale continues to hold an allure for Chesapeake, despite its gassy nature. Net output in 4Q2012 in the northern dry gas portion was 645 MMcfe/d, which was 135% higher year/year in 4Q2012 and 19% more than in 3Q2012. Chesapeake has reduced its operated rig count to five rigs; that level of activity is projected to remain constant this year.
Average net production in the southern wet gas portion of the Marcellus averaged 155 MMcfe/d in 4Q2012. Production from this portion of the leasehold is scheduled to "remain relatively flat" until the Appalachia-to-Texas, or Atex, pipeline infrastructure is completed, which would carry processed ethane to the Gulf Coast. The pipe is scheduled to be online by early 2014.
The Mississippian Lime leasehold, which stretches across northern Oklahoma to southern Kansas, produced on average 32,500 boe/d in 4Q2012, which was 208% higher year/year and 30% more than in the previous quarter. About 45% of total output in the final period was oil, while 46% was natural gas, Dixon said.
At the end of 2012 Chesapeake had 273 producing wells in the Mississippian, including 55 that reached first production in the final quarter, compared with 73 in 3Q2012 and 49 in 2Q2012. Forty-six wells have been drilled but are not yet producing; they are awaiting completion and/or are waiting on infrastructure. Eight rigs now are running, a level that is expected to be the same through the year.