Chesapeake Energy Corporation (CHK) Reducing Per-Unit Production Costs

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On Feb. 21, Chesapeake Energy Corporation (NYSE:CHK) surprised Wall Street by beating estimates on both top and bottom lines. The company’s latest earnings call was focused on increasing profitability by shifting production from gas to liquids to boost revenue, and becoming more efficient to lower costs. To meet its efficiency goals the company intends to reduce capex and lower per-unit costs by transitioning to pad drilling.

Transition to pad drilling

Pad drilling might sound like a fun game for tablets, but it actually refers to a technique that allows rig operators to drill several wells at a time. After drilling one well rigs typically need to be taken apart, loaded on a truck, transported to the next location, then reassembled. Pad drilling significantly boosts a crew’s efficiency because the rig is simply nudged a few yards along the pad where it begins a new well.

Chesapeake Energy Corporation (NYSE:CHK)On the surface, there may appear to be a single well, but underground there can be as many as ten horizontal wells lying parallel to each other. During the life of the well, costs associated with capturing and transporting are also reduced. During the Q4 2012 earnings call, Chesapeake Energy Corporation (NYSE:CHK) COO Steve Dixon claimed that the company is targeting capital efficiency gains of at least 15-20% as they transition to pad drilling techniques.

Getting more and spending less

During the fourth quarter of 2012 Chesapeake connected 98 wells in the Eagle Ford Shale. The company expects to continue at the same rate of about one hundred wells per quarter in that area, but intends to reduce the overall rig count by 14. During Q4 2012 the average time between starting wells — spud-to-spud time — was 18 days. During the same period in 2011, that time was 26 days. That’s about 30% faster, and not surprisingly about 30% less expensive.

So far this year spud cycle times continue to decrease. Recently, in the Eagle Ford Shale, a Chesapeake crew finished a well in just 8 days. Looking ahead to 2014, the company expects to increase the percentage of wells drilled on existing pads by more than threefold compared to its estimates for 2013.

Chesapeake is not the only company enjoying pad drilling savings

Also operating in the Eagle Ford Shale is Pioneer Natural Resources (NYSE:PXD). During its Q4 2012 earnings call, the Irving, Texas based independent producer noted it expects to drill about 130 new wells in the Eagle Ford Shale this year. By employing pad drilling techniques it expects to save between $600,000 and $700,000 per well, a savings of more than 10%.

Independent oil and gas producer Devon Energy Corp (NYSE:DVN) has also been enjoying increased efficiency by using pad drilling techniques. During its Q4 conference call the company reported a spud cycle time reduction of more than 20% year-on-year in the Cana Woodford Shale.

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