Tickers in this Article: CHK, XOM, PXP, XCO
Although Chesapeake Energy (NYSE:CHK) has established a goal of increasing the company's exposure to oil and liquids over the next decade, the company is still heavily levered to natural gas and will be for years to come.

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Chesapeake Energy reported production of 2.9 billion cubic feet per day of natural gas as of the end of September 2010. This was 90% of the company's total production, with 6% in oil and 4% in natural gas liquids.

This level of natural gas production makes Chesapeake Energy the second largest domestic producer of natural gas, with only Exxon Mobil (NYSE:XOM) producing more due in part to its recent acquisition of XTO Energy.

Although this natural gas production was split among most of the major natural gas shale plays in the United States, the Haynesville Shale is Chesapeake Energy's most productive natural gas shale plays, representing 27% of total natural gas production as of September 2010.

Haynesville Shale
Chesapeake Energy has 530,000 net acres under lease in the Haynesville Shale, and proved reserves of 2.9 Tcfe as of the middle of 2010. The company signed a joint venture agreement with Plains Exploration and Production (NYSE:PXP) in July 2008, and sold a 20% stake in return for $3.2 billion in cash and a drilling carry. Joint ventures are a common strategy for Chesapeake Energy as it seeks to share risk and fund future development costs.

Chesapeake Energy is still operating 34 rigs in the Haynesville Shale as the company seeks to hold acreage and fulfill its obligations under the joint venture agreement.

The company does expect activity here to wind down slightly and by the end of 2011, Chesapeake Energy plans to be operating 22 rigs in the Haynesville Shale as the company shifts capital to areas with better returns.

Another large operator in the Haynesville shale is EXCO Resources (NYSE:XCO), which has 80,000 net acres that are prospective for the play in Texas and Louisiana. EXCO Resources currently produces 500 million gross cubic feet per day from its Haynesville Shale properties.

Returns
The Haynesville Shale is only marginally attractive at current natural gas prices as measured by the pre-tax rate of return that Chesapeake Energy has calculated on wells drilled here. The company said that a typical Haynesville Shale well has a low single-digit pre-tax rate of return assuming a $4.00 NYMEX natural gas price and an estimated ultimate recovery (EUR) of 6.5 billion cubic feet equivalent. The return drops close to zero for wells with a EUR of 4.5 billion cubic feet equivalent.

Chesapeake Energy can't escape its natural gas heritage, particularly in the Haynesville Shale, as the company seeks to shift towards oil and liquids plays in the United States. (For related reading, take a look at Unearth Profits In Oil Exploration And Production.)

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