These Could Be the Best Long-Term Natural Gas Investments
“The Associated Landowners of the Ohio Valley (ALOV)” Business Journal Daily reports, “has agreed to a preliminary agreement with utility giant Chesapeake Energy Corp. that awards the energy giant drilling rights to at least 25,000 acres across six counties in eastern Ohio.”
This represents the latest of Chesapeake’s deals in the newest shale hotspot, the Ohio-based Utica formation. And provides us with positive reinforcement for what we discussed yesterday in our “good, bad and ugly” write-up.
The Utica formation, in particular, is poised to be the company’s next big business unit. And heck, if it’s just half as lucrative as Chesapeake’s dealings in the Marcellus shale, then shareholders are in for another leg upward.
But that’s not the only trick up this company’s sleeve.
Chesapeake has another strong force that makes it a solid natural gas investment going forward. This according to our friends at Rigzone:
Chesapeake initiated its service company vertical integration strategy in 2001 with a $25 million investment to build and refurbish five drilling rigs.
In the past 10 years, Chesapeake has built what it believes will become a top five U.S.-focused oilfield service company.
The goal of Chesapeake’s service company vertical integration strategy is to provide premium services at attractive prices to Chesapeake’s E&P operations while improving operating efficiencies, lowering costs and serving as an inflation hedge.
Including Chesapeake’s 30% interest in Frac Tech International, LLC, the company has invested approximately $1.8 billion in its service companies and believes in 2012 its service companies could be worth between $7-10 billion
Chesapeake is a forward-looking company — and in 2001 they guessed at the direction the industry was going, and they nailed it.
By dabbling in the service side of the business Chesapeake got its foot in the door on what I’d say is the MOST lucrative natural gas investment you can make today: oil and gas service companies.
You see, no matter what is happening with the price of natural gas, there’s an immediate (and long-lasting) need for the service companies. This is especially true for shale gas.
The takeaway is that with more rigs comes more need for service providers. [For more information on the rig trend you can see a full write-up and associated chart in an article I posted here back in September.]
You see, with each new well comes the task of completion. After you drill your shale well, let’s say down 8,000 ft and then turned horizontal — you still need to perforate and hydraulically fracture the production zone.
Normal drillers can’t perform these completions on their own! Even after a company has leased it’s drill rig and drilled the well, they’ll likely have to wait to have the well completed.
This is where the expertise and onsite know-how of oil service companies comes into play.
And right now the service providers are booked solid — creating a backlog in well completions. And creating a profitable bottleneck for oil service companies.
This bottleneck creates another profitable situation for Chesapeake and their vertically integrated service company.
Chesapeake has effectively hedged that part of the business out of the equation. By owning it’s own service company it can maintain low costs and even profit from the oil service bottleneck.
The other winners are the outright service companies. If you’re looking to get a footing in the shale market Chesapeake is a good place to start — but when the rubber hits the road you’ll want to have a bevy of the best oil service companies, too.
Keep your boots muddy,
– Matt InsleySource: Daily Resource Hunter
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