Fort Worth Star On CHK
Despite late start, company has big plans in the Barnett Shale
By DAN PILLER
STAR-TELEGRAM STAFF WRITER
Chesapeake Energy may have been late to the Barnett Shale natural-gas boom around Fort Worth, but the company is working double-time to catch up.
The Oklahoma City-based company entered the field late last year with $277 million to gain 18,000 acres of leases and a few-dozen wells in Johnson County.
"We've more than doubled the well count, to 99, from what we bought from Hallwood Energy when we came into the play," said company Chairman Aubrey Kerr McClendon.
McClendon plans to add more.
"We have six rigs going in Johnson County, mostly from Cleburne to Godley, and by next year we'll have 10 rigs in Johnson County," says McClendon. "We've added to our acreage into the southern part of Johnson County and into Hill County, and it now totals about 50,000 acres. We have the potential for between 500 and 750 wells."
To back up his plans, McClendon has embarked on a rig-building program that by next year will expand Chesapeake's fleet of 12 company-owned rigs to 40.
The Johnson County operation is supported by a field office in Cleburne that employs 25 people.
That strategy, McClendon hopes, will give him an edge over rivals in what has become a serious equipment shortage in the Barnett Shale and other big-producing fields. Until recently, most energy producers have been content to lease their drilling equipment from service companies.
But a shortage of rigs, and a tripling of day rates since the beginning of this decade, has caused McClendon and many others in the business to rethink that strategy.
"We are comfortable being in the rig business," says McClendon. "We've been part owner of a rig-building company, and we know the business. More important, the rig shortage is such that in the future it will pay to own equipment rather than lease it."
Such a strategy would put Chesapeake in a position to take advantage of the many leases in the Barnett Shale that are expected to lapse without drilling in the next two years because operators were unable to contract for equipment.
"We're not sure about the validity of the play to the west, in Erath, Bosque and Somervell counties," McClendon says. "But then, we originally were unsure about Johnson County, too, and now we're there. So if the western part of the Barnett Shale develops, there won't be enough rigs to lease to drill it. We'll have rigs."
McClendon's approach is characteristically aggressive for a company that was founded in 1989, went public in 1993 and now is the most active land driller, with 74 rigs it operates directly and another 72 with partners.
It has followed the general pattern of the new generation of independents such as XTO Energy, Range Resources and Quicksilver Resources in Fort Worth and its Oklahoma City rival, Devon Energy that emerged from the debris of the 1980s energy bust.
Like the other newbies, Chesapeake was free of the debts and losses incurred in the '80s, and thus could buy producing properties when they came on the market in the 1990s and early this decade.
Last week, Chesapeake announced a $2.2 billion purchase of CNR Energy, a Charleston, W.Va., natural-gas producer that will put Chesapeake in the middle of the large and often under-rated Appalachian natural gas field.
Chesapeake is the nation's fifth-largest natural-gas producer.
Its operations are all on land, concentrated in all the major producing basins of Texas and Oklahoma plus the New Mexico end of the Permian Basin.
Ninety-two percent of Chesapeake's production is natural gas, a figure that prompts independent energy analyst Kurt Wulff of Needham, Mass., to jokingly refer to Chesapeake as a "swinger."
"Don't get me wrong, I like Aubrey, and he's done a great job," says Wulff, a perspective the stock market has supported by running up Chesapeake stock by 120 percent in the last year. "It's just that I'm more of a 50-50 kind of guy, split between oil and gas. But it's working for them."
In the 1990s, Chesapeake made its mark by drilling deep wells, 18,000 feet or more, in the Permian Basin and in the Bossier Sands play around Nacogdoches in East Texas. Toward the end of the decade, the company's officers had an epiphany.
"You could see a natural-gas train wreck coming, with all the new gas-fired electricity generators being built and with U.S. production pretty much static," McClendon said. "Natural gas was coming into a shortage."
Chesapeake continued to aggressively add to its properties in Texas.
But while rival Oklahoma City producer Devon Energy jumped into the Barnett Shale in 2002 by purchasing the pioneering position of Mitchell Energy in Wise and Denton counties, Chesapeake hung back.
"Devon got the early, developed part of the Barnett Shale, and there was a lot of uncertainty about the land west and south of Fort Worth," McClendon said, reflecting the long-held uneasiness many geologists and engineers felt about the geology of Johnson, Parker and Johnson Counties.
"Gradually, we began to understand the play and felt more comfortable with it," McClendon said.
The result was Chesapeake's purchase last December of the northern Johnson County wells and leases from the privately held Hallwood Energy, which had pioneered Johnson County production beginning in 2002.
Hallwood, based in Cleburne, has continued as a Barnett Shale player in other parts of Johnson and Hood counties.
"We're happy with Johnson County," McClendon says. "We expected the northern wells to get up to 3 million cubic feet per day and they've actually produced about 10 percent more.
"In the southern part of our acreage, we thought we'd get about 2.5 million cubic feet per day and again we've exceeded that."
Nice Pic of Aubry if you want to downlaod the story:
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