Chesapeake’s 2/20/24 Q4’24 earning press release contained a startling shift in strategy which has sent Henry Hub futures climbing. The release, which we will unpack in detail below, formally introduced a new kind of production management, not officially seen outside of the NorthEast called “Managed TIL Lag”. Managed TIL Lag is a production management strategy where the final turned in line [TIL] event, generally involving water flow back and gathering system connection, is delayed for better pricing.
Diagram of a well lifecycle from SPUD to TIL
Satellite image of a TIL crew
Chesapeake’s Press Release
Activity Declines
“Chesapeake is currently operating nine rigs (five in the Haynesville and four in the Marcellus) and four frac crews (two in each basin). Given current market dynamics, the company plans to defer placing wells on production while reducing rig and completion activity. The company will drop a rig in the Haynesville and Marcellus in March and around mid-year, respectively, and a frac crew in each basin in March. These activity levels will be maintained through year end.”
Chesapeake is reducing rigs 22% and frac crews 50%. The disparity implies their intention to build DUCs which have been declining since the start of 2023.
CHK DUC inventory by sub_region
Beyond the rig and frac declines CHK talks about delaying TILs, here calling it “defer placing wells on production.” Later in the release they specify plans to TIL 30 to 40 new wells in all of 2024. For comparison in 2023 CHK TILd 166 wells. The 2024 TIL plans are made more stark by the fact that 25 of 30 to 40 have already been brought into production. Leaving just at most 15 TILs for the entire remainder of the year.
Chesapeake’s Decline Profile
CHK stated production guidance, Q4,23 Earnings Presentation, slide 10
With the companies stated expectation of 2024 production averaging just 2.7bcf/d, and using SynMax’s decline curve model, we expect with no new activity CHKs current Q1’24 production of 3.15 bcf/d to decline to just 2.08 bcf/d over the final quarter of 2024. Adding in the 15 remaining TILs spread out over the rest of the year CHK can under this strategy average 2.33bcf/d over Q4 or 2.7bcf/d average for the year.
Chesapeake base-case 2024 production scenario, all figures in bcf/d
The company's existing decline production profile, not to be confused with new well declines, is weighted more towards new wells in the fast declining Haynesville - LA region which means in 12 months of no activity production would decline to just 62% of its current value. This is slightly better than the production decline profile of the overall Haynesville - LA region but much less than other, more stable regions like Haynesville - TX. For comparison the decline profile of Comstock is worse with only 55% of original production remaining 12 months later.
Total, not well-level, aggregate production declines
Price Dependency
“Deferring new well production and completion activity will build short-cycle, capital efficient productive capacity which can be activated when consumer demand requires it.”
The company is very clear to state that this TIL management strategy is directly tied to price. For active producers such a strategy gives them production optionality without resorting to direct well shut-ins.
Interestingly we may have observed this behavior from them before, although they were not as open about it and did not mention anything in their earnings calls. In June of 2023 CHKs TIL lag, which is generally about 15 - 25 days, jumped to over 50 days. The timing is suspect as steep CONTANGO in gas markets made the delay well-timed.
TIL Lag for Haynesville and CHK by month
Is managed production through TIL lag the new normal for Haynesville? We believe so. Once fine-grained TIL control is developed, operators stand to gain a lot from managing their production more like storage. Storage which is desperately needed as both supply and demand have grown without a commensurate increase in capacity. Operators have time and again proven their tenacity. Well-level efficiencies continue to grow, and producers have demonstrated both the desire and aptitude to optimize themselves. TIL managed production is a next logical step.
Our Response to a New Paradigm
Hyperion Energy Dashboard
As you may have already noticed, Haynesville daily production has departed materially from our expectations. We firmly believe this is the result of TIL production management by Chesapeake and others in the region, something our model does not capture. While our short term forecast does contain a TIL model it relies on a stable relationship between past and future TIL behavior. Things like operator, season and recent TIL activity have in the past been reliable indicators of future TILs, this is no longer the case.
Haynesville Short Term Forecast TIL scenarios
With TILs uncertain, it is possible, however unlikely to see material Haynesville declines of up to 1.4bcf/d over the next two months in an extreme scenario. Under a more likely 50% reduction in TIL activity our short term forecasts revises down 0.34bcf/d and 0.47bcf/d in March and April respectively.
To help hone in on which scenario may be transpiring SynMax has begun looking at satellite images of TIL inventories in the Haynesville. The analysis will not only reveal which operators are responsible for delayed TILs but will also give us an indication of TILs new price elasticity. Once complete we will release this data to customers, along with an improved price sensitive TIL model feeding into the short term forecast.
