Chesapeake to throttle back on gas, bank on oil, NGLs
Washington (Platts)--7Aug2012/230 pm EDT/1830 GMT
(Correcting typographical error in headline)
After spending nearly a decade and billions of dollars creating a land
acquisition and exploitation machine, Chesapeake Energy is taking its foot
off the pedal, predicting it will produce 7% less natural gas next year as it
continues to shift its extraction focus to oil and natural gas liquids.
In its guidance issued with its second-quarter earnings report after the
stock market closed Monday, Chesapeake forecast that its daily gas production
would fall to an average of 2.9 Bcf/d in 2013 from an average of 3.1
Bcf/d this year. Even with the reduction,the Oklahoma City-based company
would continue to be the second-largest gas producer in the US.
At the same time, Chesapeake is forecasting an 80% increase in crude oil
production to 101,370 b/d in 2013 and a 30% increase in NGL volumes to 68,493
b/d next year.
"While low gas prices have made this shift to liquids-focused production
more difficult to achieve, those falling gas pries also made the shift more
urgent," CEO Aubrey McClendon told analysts on a conference call Tuesday.
But slowing down gas production may be harder than it looks. "Chesapeake
may be finding it difficult to rein in gas production from prolific shale
plays as has been the case this year," Jefferies & Company analyst Biju
Perincheril said in a note to clients.
While Chesapeake revealed Tuesday that it has fewer than 10 dry gas rigs
drilling gin the US, it has 78 rigs drilling wet, oiler shales from South
Texas to Colorado, wells that will still produce associated gas.
Six of those dry gas rigs are in northeast Pennsylvania's portion of the
Marcellus Shale, a number Chesapeake Chief Operating Officer Steve Dixon
said would be cut to four by year-end.
Chesapeake's overall rig count will drop to around 100 next year, Dixon
"We were planning to run 200 rigs in 2013 and our plan [now] is to run
100," McClendon said. "So we've certainly scaled down."
"In the Mississippi Lime, we have decided to do less pure HBP [held by
production] drilling and go to some core and some infield drilling there to
help our returns and also not to get too far ahead of our infrastructure,"
Chesapeake doubled its profits to $929 million, $1.29/share, in the
second quarter, on the strength of one-time gains from the sale of midstream
assets and a gain in the value of its hedging portfolio. Removing the on-time
items left adjusted profits of $3 million, or 6-cents per share, 99% less
than the $528 million worth of adjusted profits reported in the
second quarter of 2011.
McClendon and Chesapeake also said they are well on the way to
getting sales agreements for $7 billion worth of Permian Basin and midstream
assets they plan to sell this quarter, a figure that would almost eliminate
the gap between income from operations and spending plans this year.
Chesapeake plans to overshoot its original goal of $11.6 billion in asset
sales this year and is now says it will sell between $13 billion and $14
billion in holdings to help pay down debt.
Houston-based independent EnerVest will take a block of Chesapeake's
acreage in the Midland Basin of Texas, while the company has acceptable bids
from two unidentified parties for its New Mexico Delaware Basin acreage and
Texas Delaware Basin acreage, McClendon said Tuesday.
Chesapeake initially marketed the 1.5 million acres of Permian shale
oil acreage as a single package, but also had a three-way split of that
acreage in the data room, McClendon added.
The sales are expected to close in the next 30 days, McClendon said, and
Chesapeake will still own some Permian acreage when the process is complete.
Low natural gas prices hurt Chesapeake's bottom-line. While oil and
liquids production jumped double digits in the second quarter, natural gas
still accounts to 79% of Chesapeake's production and the price for gas
dropped 64% between the second quarter this year and last, to $1.88/Mcf.
Chesapeake nearly doubled its oil production to 80,494 b/d in the second
quarter, an 88% increase over the second quarter last year. But the
producer's average realized price for that crude only increase 4% to $91.58/b
Natural gas liquids production of 49,715 b/d was 37% above last year's
second quarter but NGL prices also took a dive, losing 32% when compared to
the year prior, to $25.94/b.
Chesapeake reported a one-time gain of $584 million for selling its half
interest in Chesapeake Midstream Partners (now Access Midstream Partners) and
another one-time gain for a $490 million increase in the value of its hedging
--Bill Holland, firstname.lastname@example.org
--Edited by Jeff Barber, email@example.com