Chesapeake Energy Corporation has announced a new natural gas discovery in the Haynesville Shale in Louisiana. In addition, the company announced two other new unconventional natural gas discoveries and five new unconventional oil projects. The company believes these discoveries and projects are significant and has decided to increase its capital expenditure budget for 2008 and 2009 in order to increase drilling and leasing activity on these new plays as well as its three most important existing unconventional shale plays: the Barnett Shale, the Fayetteville Shale and the Marcellus and Lower Huron Shales in Appalachia.
As a result of recent drilling results, Chesapeake is announcing eight new unconventional natural gas discoveries and unconventional oil projects described below.
Haynesville Shale: Based on its geoscientific, petrophysical and engineering research during the past two years and the results of three horizontal and four vertical wells it has drilled, Chesapeake believes the Haynesville Shale play could potentially have a larger impact on the company than any other play in which it has participated to date. Chesapeake is currently utilizing four rigs to drill Haynesville Shale wells and plans to increase its drilling activity level to approximately 10 rigs by year-end 2008 and potentially more in 2009. The company currently owns or has commitments for more than 200,000 net acres of leasehold in the Haynesville Shale and has a leasehold acquisition effort underway with the goal of owning up to 500,000 net acres in the play.
Colony Granite Wash (Anadarko Basin of western Oklahoma): Chesapeake is also announcing the discovery of the Colony Granite Wash play in Washita and Custer Counties, Oklahoma. Developed internally two years ago, the Colony Granite Wash play is now producing 40 million cubic feet of natural gas equivalent (mmcfe) per day net to the company from 12 net horizontal wells. Chesapeake is currently utilizing four rigs to further develop its leasehold of approximately 60,000 net acres in the Colony Granite Wash play that the company believes will accommodate the drilling of approximately 250 additional net horizontal wells over time.
Mountain Front Granite Wash (Anadarko Basin of southwestern Oklahoma and Texas Panhandle): During the past few months, Chesapeake has drilled three horizontal Granite Wash wells along the 150 mile Mountain Front area of the Anadarko Basin. The company believes its current leasehold of approximately 75,000 net acres will accommodate the drilling of approximately 400 additional net horizontal wells over time.
Five New Unconventional Oil Projects: Chesapeake is also announcing today that it has identified five new unconventional oil projects, four of which have been developed on a proprietary basis. The projects range in size from approximately 100,000 to 1,000,000 acres and are located in four different states in the U.S. Chesapeake has commenced oil production in two of the projects and initial drilling in the other projects is scheduled during the next 12 months.
Chesapeake Increases Drilling and Leasehold Acquisition Activities in the Fort Worth Barnett Shale, Fayetteville Shale, Marcellus Shale and Lower Huron Shale Plays
In addition to the increased drilling and leasing activity on the new discoveries and projects described above, Chesapeake plans to increase drilling and leasing activities in several of its existing shale plays discussed below.
Fort Worth Barnett Shale (Greater Fort Worth Area): Chesapeake is continuing its drilling and leasing program in the Barnett Shale, particularly in the Core and Tier 1 sweet spot of Tarrant, Johnson and western Dallas counties. The company's net natural gas production in the Barnett Shale is now approximately 450 mmcfe per day. Chesapeake plans to increase its Barnett Shale drilling activity by five rigs, from 40 to 45 rigs by year-end 2008.
Fayetteville Shale (Arkansas): In the Fayetteville Shale, Chesapeake's net natural gas production is now approximately 130 mmcfe per day. The company plans to increase its Fayetteville Shale drilling activity from 12 rigs currently to approximately 25 rigs by early 2009 in response to the company's recent 10% increase in expected estimated ultimate per well recoveries for horizontal Fayetteville Shale wells.
Marcellus and Lower Huron Shales (Kentucky, West Virginia, Pennsylvania and New York): Chesapeake owns a leasehold position of 1.6 million net acres in the Marcellus and Lower Huron Shale plays. The company has drilled 26 vertical and horizontal Marcellus and Lower Huron Shale wells to date and plans to drill approximately 165 vertical and horizontal Marcellus and Lower Huron Shale wells in 2008 and 2009.
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Company Raises Capital Spending Plans for Increased Drilling Activity and Leasehold Expenditures
To capitalize on the new discoveries, projects and existing plays described above, Chesapeake is increasing its capital expenditure plans for 2008 and 2009. In light of higher per well reserve recovery expectations and decreasing per well costs in key shale plays, the company plans to increase its drilling activity levels in each of 2008 and 2009. Specifically, Chesapeake plans to increase its current drilling activity levels in the Fort Worth Barnett Shale, Fayetteville Shale and Haynesville Shale plays by 24 operated rigs by year-end 2008.
As a result of the Haynesville Shale discovery and other new discoveries and projects, the company also plans to increase its leasehold expenditures to more fully capture the value of the plays and projects recently identified by Chesapeake. Chesapeake currently plans to spend an additional $275 million and $675 million for drilling and leasehold in 2008 and 2009, respectively, as compared to its previously announced spending plans.
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Chesapeake Raises 2008 and 2009 Production Forecasts and Increases Natural Gas Hedging Positions
Due to higher recovery expectations in various plays and increased drilling activity levels, the company has raised its 2008 and 2009 production forecasts by 30 and 100 mmcfe per day, respectively. Accordingly, Chesapeake now expects its average daily production rate to increase in 2008 by approximately 21% over its 2007 average rate to 2,370 mmcfe per day and in 2009 by approximately 16% to 2,740 mmcfe per day. These are increases of 5% and 33%, respectively, over 2008 and 2009 production growth levels of 20% and 12% projected by the company last month.
Company Revises Capital Funding Plans Due to New Discoveries and Increased Capital Expenditure Budgets
Chesapeake believes the combination of developing the new discoveries and projects announced today, increasing drilling activity levels to accelerate the development of existing plays, and the higher cost of acquiring leasehold in some of the company's most important plays creates the need for an increase in the company's capital expenditures.
The company had planned to fund its 2008 and 2009 capital expenditures through cash flow from operations, borrowings under its revolving credit facility, and from previously announced producing property monetizations and the sale of a minority interest in a private partnership for the company's midstream assets. These initiatives remain on track for completion in the second quarter of 2008, although it is possible that current uncertainty in the financial markets could impact this timing. Considering that uncertainty and the increasing number of upside growth opportunities available, the company now expects to fund some or all of these additional expenditures through the public capital markets. Although a departure from its previously announced plans, Chesapeake believes that the potential incremental financial returns available from its increased capital spending will far exceed the expected capital costs.