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NEW YORK (
Trefis) -- The dramatic fall in natural gas prices in the U.S. has left
Chesapeake Energy(CHK) in a difficult financial position.
It's been in a hurry to sell off assets to meet its funding shortfall, which is estimated to be at $22 billion. Chesapeake is considering selling off many fully or partially owned midstream businesses alongside some gas and oil fields.
It recently completed a $2 billion deal to give up its 46% stake in its affiliate
Chesapeake Midstream Partners(CHKM).
Chesapeake's core business was natural gas exploration, but management is considerably shifting focus to a balanced mix of dry gas and liquids production to support sustainability of cash flows in future.
We have a
Trefis price estimate of $19 for Chesapeake, which is in line with the current market price.
See our complete analysis for Chesapeake at
Utica Shale: Tremendous Potential
The move toward more natural gas liquids and oil is reasonable as oil is an indispensable commodity, at least in the near future. Although natural gas is also an indispensable commodity, it has been vulnerable to price slumps.
Hence, there is a gold rush for reserves that are likely to hold more oil than gas or NGL. In January, 2012, the French company
Total(TOT) agreed to partner with Chesapeake in the Utica Shale reserve joint venture with a $2.3 billion investment.
Chesapeake spent heavily on Eagle Ford Shale earlier and claimed that 55% of total production in the first quarter of 2012 was oil, which bodes well for its strategies.
Another promising reserve is Utica Shale, in which Chesapeake holds the largest stake. It has drilled 59 wells in the play of which nine rigs are currently producing.
In its recently published investor presentation, Chesapeake reported that eight of those nine were wet gas windows with nearly one-third being oil output, which is relatively high compared to conventional wells.
Wet gases typically include ethane, propane and butane. Chesapeake has budgeted nearly 39% (nearly $3 billion) for Eagle Ford and 8% (nearly $600 million) for Utica Shale of its 2013 estimated total capital spending.
There is, however, some doubt about the oil reserves of the entire Utica Shale area despite encouraging results from initial drilling. Ohio officials estimate 1.3 billion to 5.5 billion barrels of oil in the play, which could be higher than the Eagle Ford Shale in Texas, which the U.S. Energy Information Administration estimates holds 3.4 billion barrels of oil. Eagle Ford and Utica Shale are the two most prominent oil plays in Chesapeake's strategy to move to oil-based fields.
There are two scenarios with respect to Utica Shale: 1) Chesapeake sells off the majority stake in Utica to stay afloat (because it's highly valued); or 2) Chesapeake waits for the long-term output profile.
We believe, even if the output profile is not inclined toward oil, the company can still benefit as gas prices will recover by the time those wells start operating.
The company has disclosed information about only eight of the 59 wells dug and has held back information relating to the rest, which could be a strategy if they already know that those wells are heavy on dry gas.
Chesapeake's stock derives nearly 52% value from oil production and 44% from natural gas production, according to our estimates, which could change if we see a sooner-than-anticipated reversal of gas prices.
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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.