The Utica Shale is leading the way for Chesapeake Energy's (CHK) growth. In the third quarter of 2013, production in the Utica shale shot up 91% compared to the previous quarter. With 63 additional wells being connected to pipelines in the third quarter, Chesapeake Energy delivered 165 million cubic feet of natural gas equivalent per day. The company drilled 377 wells in the play, of which 169 are producing and 208 wells are still in different stages of completion.
Chesapeake Energy has begun to reap the benefits of infrastructure finally coming online at the Utica Shale, unravelling the play's potential. The game changer for Chesapeake has been the Kensington gas processing plant, which is a joint venture between Access Midstream Partners (ACMP), M3 Midstream, and EV Energy Partners (EVEP). The first phase of this project came online in the third quarter this year. It has a capacity of processing 200 million cubic feet of gas per day. The second phase of the project is scheduled to be completed next month, which will add another 200 million cubic feet of gas processing capacity at the Utica shale. Chesapeake is the leading player in the Utica shale, and its operations there remain the key to the company posting an expected adjusted EBITDA of $5 billion in 2013, a growth of 33% over the previous year.
Another development in the Utica Shale is the Appalachia-to-Texas Express Pipeline, also called the ATEX. This pipeline offers an option to Chesapeake to transport natural gas liquids, or NGL, from the Utica shale. ATEX is a project undertaken by Enterprise Products Partners (EPD) that is expected to come online in the first quarter next year. The pipeline has been designed to transport ethane to the Gulf Coast chemical companies, and it can handle up to 190,000 barrels per day. Chesapeake is a key shipper on this project, having a contract to transport 75,000 barrels per day, and it is expected to benefit from the project coming online.
On the NGL front, Enterprise Products has more reasons to be happy with the addition of an eighth NGL fractionation unit at its Mont Belvieu facility last week. This unit has a fractionation capacity of 85,000 barrels per day of NGL, increasing the overall fractionation capacity at Enterprise's Mont Belvieu facility to around 655,000 barrels per day. This is the second unit to be commissioned by Enterprise Products in the last two months, both of which were completed before schedule and within budget. With this latest capacity expansion, Enterprise now owns an NGL fractionation capacity of 560,000 barrels per day at Mont Belvieu, an increase of 13% over the previous fractionation capacity. This will allow Enterprise to address the growing NGL production from the domestic shale plays like the Eagle Ford shale and Mid Continent regions.
Changing public stand on fracking
Fracking has faced opposition from the public over the years for the environmental concerns related to the process regarding air and water pollution. Chesapeake has realized the importance of a positive public opinion on fracking, and it is continuously working to make the process even safer. The Aqua Renew program initiated by the company is serving a two-fold purpose. While it helps the company in its environmental conservation efforts, it is also helping the company's bottom line. This program helps Chesapeake recycle 97% of its wastewater in Marcellus North, 52% in Marcellus South, and 89% in the Utica district.
Combustion of natural gas produces water, which can be used to drill a well. Typically, the amount of water required to drill a well is equal to the amount of water produced by combustion of 525 million cubic feet of natural gas, and the Marcellus shale well requires a little less than six months to produce this amount of gas. At the current natural gas price of $3.62 per million British Thermal Unit, Chesapeake could save around $1.9 million per well by saving the natural gas used to produce water. The company had 128 wells in various stages of completion in the Northern Marcellus shale at the end of the third quarter. Chesapeake's water recycling efforts could thus result in a total cost saving of around $236 million at these wells.
Hallibuton (HAL), a world leader in fracking, is focused on changing the chemicals used in the fracking process. The company has developed and continues to develop high performance fracturing fluid systems. The company has developed a new fluid system called CleanStim hydraulic fracturing fluid system, which provides exceptional fracturing and environmental performance. This fluid formation uses ingredients sourced from the food industry. The fluid is so safe that a top Halliburton executive went ahead and drank the fluid at a Quebec industry event last month. This could be a significant step in changing the public view regarding fracking, which should be particularly important for Halliburton considering that it is a leading player in fracking.
Conclusion
While the Utica Shale play's potential has remained underappreciated, the upcoming infrastructure is proving a boon, unlocking the play's true value. Chesapeake is positioned to benefit significantly from this region with the most extensive operations there. While the Utica shale has just started showing its worth for Chesapeake, late 2013 and 2014 could see the company registering robust growth from the region. The Kensington plant and ATEX will be the key to Chesapeake's growth, as they provide the supply infrastructure for the company. The changing public view of fracking activities also helps Chesapeake's cause, and the company continues to work on improving the process. This serves the twin purpose of environmental protection and cost savings for the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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