With approximately 1.5 million net acres, Chesapeake is the largest leasehold owner in the Marcellus Shale play that spans from northern West Virginia across much of Pennsylvania into southern New York. The company’s joint venture partner, StatoilHydro (NYSE:STO, OSE:STL), owns approximately 570,000 additional net acres of Marcellus leasehold. Chesapeake remains the most active driller and expects to become the largest gross producer of natural gas from the play by year-end 2009. During the 2009 third quarter, Chesapeake’s average daily net production of 35 mmcfe in the Marcellus increased approximately 21% over the 2009 second quarter and approximately 338% over the 2008 third quarter. Chesapeake is currently producing a company record monthly average of approximately 50 mmcfe net per day (100 mmcfe gross operated) from the Marcellus and anticipates reaching approximately 90 mmcfe net per day (180 mmcfe gross operated) by year-end 2009, approximately 220 mmcfe net per day (440 mmcfe gross operated) by year-end 2010 and approximately 390 mmcfe net per day (780 mmcfe gross operated) by year-end 2011. To further develop its 1.5 million net acres of Marcellus leasehold, Chesapeake is currently drilling with 20 operated rigs and anticipates operating an average of approximately 28 rigs in 2010 to drill approximately 170 net wells. During the first three quarters of 2009, approximately $85 million of Chesapeake’s drilling costs in the Marcellus were paid for by STO. During the 2009 fourth quarter through 2012, 75% of Chesapeake’s drilling costs in the Marcellus will be paid for by STO, or approximately $2.0 billion over the next three years.
Since January 1, 2008, Chesapeake has drilled and completed 40 company-operated horizontal wells in the Marcellus. Assuming flat NYMEX natural gas prices of $7.00 per mcf (compared to a recent 10-year NYMEX strip price of approximately $7.25 per mcf), the company’s estimated pre-5 tax rate of return from a 4.2 bcfe horizontal Marcellus well drilled for $4.5 million is approximately 66% excluding the benefit of drilling carries and more than 1,000% including the benefit of drilling carries. The STO drilling carries should result in Chesapeake delivering lower finding costs, higher returns on invested capital and higher production growth levels than other companies can deliver from the Marcellus. In addition, Chesapeake’s leasehold investment in the Marcellus to date has been approximately $1.5 billion, of which $1.25 billion, or 83%, has been recouped to date by selling a 32.5% interest in the company’s leasehold to STO. The company’s net investment in its Marcellus leasehold is now about $165 per net acre on average.
Two notable recent wells completed by Chesapeake in the Marcellus are as follows:
• The Clapper 2H in Susquehanna County, PA achieved a peak rate of 10.1 mmcf per day; and
• The Otten 2H in Bradford County, PA achieved a peak rate of 8.9 mmcf per day.