Chesapeake Energy Corporation (NYSE:CHK) drilled the most productive well in the company’s history last week. The ailing oil and gas exploration company found the well in the Texas Panhandle, the most northerly and rectangular shaped area of the state that borders with New Mexico and Oklahoma.
The new well produced 5,400 barrels of crude oil each day in its first eight days of operation. At the same time the well produced 4.6 million cubic meters of natural gas and 1,200 barrels of natural gas liquids. A spokesman for Chesapeake told Business Week that the well was the best in the history of the company.
The well, and the entire region, is being talked up as a great opportunity as the company seeks to produce more crude instead of natural gas. The price of natural gas has caused the company’s profits to slide and caused a similar reaction among investors. Supply of natural gas is simply outstripping demand and there does not seem to be a simple solution.
Despite the hopeful strategy of increasing oil production does come with a caveat. The wells also produce natural gas and in the firm’s attempt to replace that product with more oil they are doing consistent harm to the future of the gas industry.
Wells across North America are ceasing production because it is simply not profitable to produce natural gas any longer. Chesapeake, however, keeps drilling. There are two dynamics going on here that are precipitating this behavior.
The first is the aforementioned quest to produce more oil in order to improve the company’s finances which are in a precarious position. The second is increasing the value of the land held by the company so that the firm is worth more if it needs to sell it or offer it as a joint venture.
The firm is currently in the middle of a deal that will see them shed a targeted $20.5 billion in assets by the end of next year. As it shows more and more fields have proven reserves it increases the value of the assets under their control. That is good for the company on one side but bad on the other.
Chesapeake needs to decide what it want to be. It can either ride out the low in natural gas by reducing production by a large amount and slowly creating structural increases in demand, or it can continue buying and selling assets like it has for some years now.