RE: RE: Chesapeake Major producers like Chesapeake Energy (NYSE: CHK), recently announced sizeable – and immediate – production cuts. As Chesapeake CEO, Aubrey K. McClendon, said, “We have committed to cut our dry gas drilling to bare minimum levels.”
Obviously such bearish actions don’t bode well for a pickup in natural gas prices over the short to intermediate term.
And that has the contrarian in me chomping at the bit. Here’s why…
The Lucrative Potential of “Wet Gas”
Don’t worry… just because I’m contrarian doesn’t mean I’m stupid. So I’m not about to recommend that you try to catch the proverbial “falling knife.”
So avoid investing in natural gas exploration and production companies.
But just because natural gas may be the most hated commodity in the world right now, that doesn’t mean investment opportunities are non-existent.
Note what McClendon said above. He didn’t say the company is cutting all of its drilling to a bare minimum. When he uses the term “dry gas” he’s referring to deposits that contain nothing but natural gas. By contrast, wet gas deposits contain liquids like oil and other hydrocarbons (e.g., ethane, propane, butane and isobutene).
In other words, wet gas deposits contain more products for producers to sell. And since the market prices for these other products are considerably higher, it makes the economics of wet gas drilling much more favorable than dry gas drilling.
How much more favorable? Well, producers could possibly triple their returns by focusing on wet gas deposits, according to Bill Holland at energy research firm, Platts.
Given that, is it really a surprise that Chesapeake isn’t cutting back its wet-gas drilling, but is instead ramping up efforts?
As Chesapeake’s Senior Director of Corporate Development, Stacey Brodak, said, “The liquids-rich area of the Marcellus [shale] should experience an increased level of investment in completing new wells.”
And it’s not just Chesapeake making the shift. Other producers are following suit, focusing their attention away from dry gas drilling to wet gas drilling