With its planned purchase of Chief Oil & Gas, announced on Jan. 25, Chesapeake Energy is leaning back into natural gas—and especially the Marcellus Shale, where it is already a leading producer.
Years spent trying to diversify into shale oil appear to have ended: Chesapeake is even selling its Wyoming oil assets to Harold Hamm’s Continental Resources. A company once synonymous with the profligate and debt-fuelled expansion of the shale gas boom has recovered its focus a year after emerging from bankruptcy, say analysts. It will use some debt to pay for the deal—but the market didn’t appear concerned. Chesapeake’s shares, buoyed also by a promised dividend increase, were up on Jan. 27 about 8% since the news broke.
RELATED:
Chesapeake Energy Refocuses on Shale Gas with Chief, Tug Hill Acquisition
Here are three points that stood out from a late-night discussion with Nick Dell’Osso, Chesapeake’s CEO, on the eve of the $2.6 billion deal.
1. Oil will remain important to Chesapeake, and its Texan oil position is not for sale
Analysts said the Chief deal was about a return to gas, but Dell’Osso “wouldn’t necessarily describe it that way.” Oil will still generate 25% of its cash flow after the deal, he pointed out. And the Eagle Ford assets, for which Chesapeake splashed $4 billion in 2018, aren’t for sale, he said, despite the rumors: “We are committed to the Eagle Ford.”
2. The companies in the best parts of the Marcellus will take market share from the others
Marcellus shale gas deals have come thick and fast lately, with operators like EQT and Southwestern Energy also adding scale. But Dell’Osso thinks the consolidation may have run its course. The biggest operators—EQT, Chesapeake, and Coterra (created by last year’s merger between Cimarex and Cabot Oil and Gas)—now have positions in the core Marcellus rocks that will sustain them for years, he said.
But the strategy now becomes about building the core’s share of production, as drilling in the best rocks replaces output lost from exhausted, less productive parts of the Marcellus.
“Production will begin to decline in some of the areas that have seen less rigs . . . and that will open up capacity in the core to fill this,” Dell’Osso said.
3. Chesapeake is not gambling on new pipelines relieving the Marcellus bottleneck
Marcellus production can’t grow much because the pipelines to take gas to other markets are almost full—and aside from small expansions and workarounds, there isn’t much more capacity to come.
Even previously approved Marcellus pipelines face new obstacles. Just this week, a court ditched some approvals for the Mountain Valley Pipeline, which is already mostly built.
Marcellus operators think their gas would solve geopolitical problems and even reduce emissions, if only new pipelines could be built. But persuading a world growing anxious about climate change that it needs more infrastructure to ship fossil fuels is now a difficult sell. And local regulators and courts aren’t offering solace.
“Brand new pipes will take a change in sentiment,” said Dell’Osso. He didn’t sound hopeful.
This article is an excerpt of Energy Source, a twice-weekly energy newsletter from the Financial Times.
Recommended Reading
Cheniere’s Next Corpus Christi LNG Stage Online by Year-end
2024-05-13 - Cheniere executives are optimistic the first LNG cargo will depart from Train 1 of its Corpus Christi Stage 3 project by the end of 2024, and that the company will bring all seven trains at the project online before the end of 2026.
What's Affecting Oil Prices This Week? (May 13, 2024)
2024-05-13 - For 2024, increasing supply will be more challenging unless U.S. producers start ramping up their capex and drilling programs beyond their current plans.
NextDecade Raises ‘Going Concern’ Doubts Amid Rio Grande LNG FID
2024-05-13 - NextDecade, which is developing the Rio Grande LNG project in Brownsville, Texas, highlighted “going concerns” amid plans to take a final investment decision on Phase 2 of the project by year-end 2024.
US Drillers Cut Oil, Gas Rigs for Third Week in a Row
2024-05-10 - Baker Hughes said oil rigs fell three to 496 this week, their lowest since November, while gas rigs rose one to 103.
Kissler: Mideast Tension Elevates Crude Prices—But for How Long?
2024-05-09 - Producers should be aggressive in locking in desirable crude oil prices on an abnormal market strength.