Oklahoma City-based Devon Energy Corp. and cross-town rival Chesapeake Energy Corp., which both built their fortunes and their reserves by successfully drilling into shale gas formations, now have too much of a good thing and are building their liquids-rich portfolios to build their revenues, the companies said last week.
Devon’s profits soared in 2Q2010 from a year earlier with net earnings of $706 million ($1.58/share), a 125% increase compared with year-ago net earnings of $314 million (71 cents). Excluding one-time items the independent earned $685 million ($1.53/share). Earnings from continuing operations increased 85% year/year to $352 million.
What drove Devon’s latest earnings were sales of oil, natural gas and natural gas liquids, which jumped 23% from the year-ago period to $1.8 billion. Higher realized prices for all three products more than offset a 3% decrease in overall production, Devon said.
Devon’s North American onshore oil and liquids production totaled 197,000 b/d, which was 6% higher sequentially from the first three months of this year. In the Permian Basin, where Devon has assembled 700,000 net acres targeting the Avalon Shale, Bone Spring and Wolfberry plays, 26 wells were drilled, including what it said was its best well to date in the play. The company currently is running 11 rigs in the Permian Basin acreage position.
In the Cana-Woodford Shale, average production jumped to 105 MMcfe/d in 2Q2010, an increase of more than 200% from 2Q2009. Two Granite Wash wells, in which Devon holds a working interest of 70% each, also ramped up in the quarter; initial production averaged 29 MMcfe/d.
In the Barnett Shale, where Devon first made its claim to U.S. gas shale, net production gains exceeded 1.1 Bcfe/d in 2Q2010, which was 3% higher than in the first three months of this year. The company expects to reach its previous Barnett production record of 1.2 Bcfe/d before the end of September.
Chesapeake last week reported net income totaled $235 million (37 cents/share) in 2Q2010, down from $237 million (39 cents) in the year-ago period. Operating cash flow was $1.13 billion in the latest quarter, versus $1.01 billion a year earlier.
Average prices realized were $5.66/Mcf and $61.43/bbl, for a realized natural gas equivalent price of $6.14/Mcfe. In the year-ago period Chesapeake’s realized average prices were $5.56/Mcf and $56.72/bbl, or $5.89/Mcfe.
Where Chesapeake showed strong gains was in output, with total production in 2Q2010 up 14% to 2.79 Bcfe/d from a year ago. Average natural gas output in the latest quarter rose 8% sequentially from 1Q2010 to 2.59 Bcf/d. However, liquids production, which still only comprises around 10% of total output, jumped 41% year/year and was responsible for 17% of realized gas and liquids revenue.
“In recognition of the significant and persistent value gap that has developed between natural gas and oil prices, Chesapeake has accelerated its transition to a more liquids-rich asset base,” CEO Aubrey McClendon said. “A significant portion of its technological, geoscientific, leasehold acquisition and drilling expertise” has been redirected “to identifying, securing and commercializing unconventional liquids-rich plays.”
The driller now has a leasehold in 12 “disclosed and several undisclosed liquids-rich plays.” An estimated 2.4 million net acres of leasehold in liquids-weighted plays hold an estimated 3 billion boe (18 Tcfe) of risked unproved resources and 8.2 billion boe (49 Tcfe) of unrisked unproven resources.
“Chesapeake’s goal is to reach a balanced mix of natural gas and liquids revenue as quickly as possible,” McClendon said. “We plan to shift our capital spending mix between natural gas plays and liquids-rich plays to approximately 45/55 by year-end 2012. By year-end 2015, we expect to increase our liquids production to approximately 200,000 b/d, or approximately 25% of total production and 40% of production revenue.
To accomplish its long-term goals, gas drilling will be reduced except in held-by-production leases, to use a drilling carry provided by a JV partner — or until gas prices are above $6/Mcf. Instead Chesapeake wants to lease and develop new liquids-weighted plays where it can acquire “very large” positions of 250,000-750,000 net acres. Within one year of entering the new plays, it plans to sell a minority interest in the leasehold to help fund future drilling costs.
Liquids drilling now is expected to accelerate until the end of 2015 when the company’s drilling expenses are balanced equally between gas plays and liquids plays, it said. It also wants to continue to add 2.5-3 Tcfe of proved reserves annually.
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