Chesapeake looks to cut its stake in Kansas oil fields

02/14/2013 10:31 AM

02/14/2013 6:25 PM

At a November meeting in Hutchinson about oil exploration and production in Kansas, a man in the audience stood up and told a panel of oil executives that he had signed a lease with Chesapeake Energy, but hadn’t heard anything from the company for months.

What’s going on with Chesapeake, he asked.

Good question.

Chesapeake, based in Oklahoma City, has accumulated 2 million acres of land leases in the Mississippian Limestone play, including several hundred thousand acres in southern Kansas. It has drilled scores of horizontal wells in northern Oklahoma, but has started only three or four wells in Kansas in the last year and none since summer.

As the company’s debt grew more burdensome last summer, it announced that it was trying to sell – or find investors for a joint venture for – its Mississippian acreage. It hoped to have a deal done by the third quarter; then it was the fourth quarter. This week a company spokesman referred to a recent investor presentation that said the company was seeking a sale or joint venture for a portion of its Mississippian Limestone acres in “early 2013.”

The company declined to elaborate beyond that.

There is plenty of speculation in the Kansas oil patch about what will happen.

“Even Chesapeake doesn’t know what Chesapeake is going to do,” said Josh Young of Young Capital in Los Angeles, which has invested in exploration companies working in Kansas.

It’s a lot of land, and so it could provide a strong entry for a large player not now in the Mississippian Limestone, or for large players who are operating only south of the border, such as Devon Energy.

Or the acres could go to Shell Oil, which has continued to add to its Kansas leases and now has 600,000 acres. Shell had no comment on its interest.

Things may have changed a bit in the last year since Chesapeake started marketing its position, say some in the industry.

CEO and company founder Aubrey McClendon recently announced that he will retire after a shareholder revolt over his free-spending ways. That kind of disruption could make it harder to make a deal in the short run. But it’s possible that new management would work harder to make a deal in the longer run, said several in the business.

One industry insider said he thought Chesapeake would be more likely to pursue a joint venture for the Oklahoma acres because it has the water wells and pipelines there, but it lacks that infrastructure in Kansas. In fact, other than the leases, it doesn’t have that much investment to protect in Kansas.

But the leases might not be quite as attractive to large players as they once were.

Some say that the early expectations for the Mississippian, driven by the sunny outlook of play leader SandRidge Energy, are now tempered by the actual difficulty in finding sufficient oil to justify the time and money. The oil is there for horizontal drillers, but it’s hard to know whether a new well will bring 400 barrels a day or 40 barrels a day.

“Our company specifically and most of our industry who are drilling in Kansas remain cautiously optimistic,” said Hiram Lewis, area operations manager for Source Energy MidCon. “We have seen there is oil in the rock, but what we are trying to do is execute in the most economical way. Many of us are getting more water and less hydrocarbons than we would like.”

But, Lewis said, he expected to work through those technical issues.

But not everybody is that patient. Big exploration company, Encana, in a conference call with analysts on Thursday, reported that it halted drilling in Kansas for 2013 because it had found too much water and not enough oil. The company has 310,000 acres in Kansas. It plans instead to concentrate on drilling in Oklahoma where results have been more encouraging.

The big guys have to learn what works and keep their costs down in order to prosper in the Mississippian Limestone, said Wayne Woolsey, owner of Woolsey Energy.

His first three horizontal wells weren’t economically viable. But the fourth is strong enough to pay for the first three. And he’s getting even better results from his fifth.

Others partly disagree, saying that while the western half of play may warrant caution, that’s not true of land farther east, in counties such as Harper, Sumner and Cowley.

“I think they are starting to identify the better parts and what’s not as good,” said Jay Snodgrass of private equity firm Iroquois Capital in New York City.

His firm is the controlling owner of Petro River Oil, an exploration company that has picked up 100,000 acres in eastern Kansas.

One thing that likely won’t happen, Woolsey said, is Chesapeake sitting on its leases for a long time.

Time is ticking on those leases, which are typically three-year leases with options to extend for two more years.

Woolsey said he see a lot of interest in the acres, for the right price.

“There is still a great opportunity in the state of Kansas,” he said.

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