Chesapeake Energy CEO Doug Lawler continues his quest to transform what used to be the nation’s second largest natural gas producer into an oil company. Yesterday the company issued its first quarter 2019 update. From that update we learn that Chessy will pull money out of its Marcellus and Haynesville shale gas drilling programs, dropping from three to two rigs in the Marcellus and from two to one rigs in the Haynesville, in order to put more money, rigs, time and effort into the company’s Powder River Basin oil drilling program. We liken their pursuit of oil riches to trying to grab St. Elmo’s Fire–it appears, and as soon as you reach to grab it, it’s gone.
Chessy produced 948 million cubic feet per day (MMcf/d) of natural gas in the Pennsylvania Marcellus during 1Q19, up 8% from producing 874 MMcf/d in 1Q18.
Although the company will drill less in the Marcellus (and Haynesville), those two regions are still big performers–“cash cows.” No reason to dump them because they cost less and produce more, adding to the bottom line. Here’s what Chessy said in the official update about its two gas plays:
Chesapeake continues to generate significant free cash flow in the Marcellus Shale in northeast Pennsylvania, primarily driven by strong realized in-basin gas prices and record production from improved well productivity through enhanced completions and longer laterals. Chesapeake achieved a record daily gross production level of approximately 2.5 bcf of gas per day in January 2019, resulting in record average net production of 948 mcf of gas per day during the 2019 first quarter. The company is currently utilizing three rigs but plans to move to two rigs by the end of June 2019. Chesapeake placed nine wells on production during the 2019 first quarter and expects to place 14 wells on production during the 2019 second quarter.
In the Haynesville Shale in Louisiana, Chesapeake expects to decrease its activity throughout the year, moving from two rigs to one rig by the end of May 2019. The company placed ten wells on production in the Haynesville Shale during the 2019 first quarter and expects to place nine wells on production during the 2019 second quarter. (1)
A brief aside to explain the difference in gross and net production for Chesapeake. As indicated above, they produced 2.5 billion cubic feet (Bcf) per day of Marcellus gas, yet they were paid for 948 MMcf/d of Marcellus gas, less than half of the gross. That’s because Chesapeake has a number of joint venture partnerships, one of the ways Aubrey McClendon could scrap together cash to mount an aggressive drilling program. He took cash giving away partial ownership (and revenue) in many of the wells drilled. So actually, there is 2.5 Bcf/d of Marcellus gas flowing from Chessy’s wells (more than Cabot’s 2.3 Bcf/d in 1Q19), yet they only get money for less than half of that gas.
Even though the Marcellus is a “free cash flow” cow for Chesapeake, Lawler still lusts for illusive oil riches elsewhere:
As a part of its ongoing portfolio optimization, Chesapeake has recently shifted a portion of its planned capital dollars from its Marcellus Shale and Mid-Continent areas to the PRB, where the company has recently moved a sixth rig. While all six rigs are currently drilling in the Turner formation, the company will transition one of the rigs to selectively drill Niobrara wells later in the year. (1)
Chesapeake’s executive VP of E&P Frank Patterson, had this to say about the Marcellus and Haynesville on yesterday’s conference call with analysts:
On the gas side of our operations, Chesapeake continues to generate significant free cash flow from the Marcellus shale. We achieved a record daily gross production level of 2.5 BCF a day in January, which resulted in a record average net production of 948 million cubic feet of gas per day during the first quarter. Appropriate spacing, enhanced completions and longer laterals continue to be game changers in the Marcellus.
Given our continued improved well performance and our commitment to a disciplined capital expenditure program, we plan to drop a rig in Marcellus in June, combined with the planned decrease in drilling activity in Haynesville, this means we anticipate averaging only three rigs in our gas asset for the second half of the year, although one of these drops was contemplated in the original budget plan. As stated earlier, the Marcellus capital would be redeployed to the Powder River. (2)
The final question of yesterday’s conference call was addressed to Lawler and asked about the Marcellus and Haynesville:
That’s great detail, Frank. Thank you. And then, if I could ask a follow-up on your — I guess your CapEx and your overall portfolio. Doug, you mentioned you have about 75% to 80% of your CapEx going to oily plays. But on the other side of that, you guys have really core — center of the bulls eye positions in really the two dry gas plays that are really working right now the Haynesville and Marcellus. And there have been some news reports in the last few days of like Saudi Aramco trying to team up with Equinor to get into the North American natural gas market. So, could you talk about how you see those two dry gas plays at Haynesville and Marcellus, what role they’re going to play in your portfolio — not in 2019 but in 2020 and beyond?
Sure, Charles. Those two assets are world class, and you got a world class operator that can mobilize, develop those resources really quickly. And we’ll continue to monitor pricing environment. The LNG build-out and as more gas carriers on the water as additional demand makes sense and economically makes sense, then Chesapeake will react accordingly and adjust the program accordingly. So, they’re super strong assets, extremely well-run here in corporately and particularly in the field. And we can revise and modify and flex our capital at any point time as economic conditions dictate. (2)
Chesapeake is a big company and drills in a number of different plays. Here’s how Reuters summarizes the news of their 1Q19 performance overall:
Oil and gas producer Chesapeake Energy Corp on Wednesday reported better-than-expected quarterly production and said it expects growth in the second half to get a boost from the less-crowded Powder River Basin in Wyoming.
Chesapeake has been moving money from its Marcellus Shale and Mid-Continent areas to the oil-rich Powder River Basin, which hit a record of 42,000 barrels of oil equivalent per day (boepd) in May.
The company now expects to put on sale output from eight more wells in the basin during the third and fourth quarters.
“Given recent optimism around the PRB (Powder River Basin) and a continued desire to shift towards more oily opportunities, this move is not surprising,” Raymond James analysts wrote in a note.
Oil companies have been looking to buy into the Powder River Basin, where pipelines are not congested and land is cheaper than the Permian Basin of Texas and New Mexico.
“Our mix will continue to shift oil throughout 2019 and 2020 as the Powder River Basin, Brazos Valley (WildHorse acquisition) grow and have a greater contribution to the total,” Chief Financial Officer Domenic Dell’Osso said on a conference call.
Shares of the Oklahoma-based company reversed course after markets, rising as much as 3.6 percent, as the management commentary’s on upbeat output at Powder River Basin helped calm investor worries about higher-than-expected spending.
Chesapeake acquired Texas oil producer WildHorse Resource for nearly $4 billion in February, adding to its outstanding debt which rose to about $9.98 billion at the end of the first quarter.
The company’s capital expenditure for the quarter of $605 million was higher than analysts’ expectation of $583.95 million at a time when oil producers are under pressure from investors to cut spending and return cash to shareholders.
Total average daily production fell 12.6 percent to 484,000 boepd, but beat analysts’ estimate of 466,169 boepd, helped by better-than-expected oil output.
Net loss available to the shareholders widened to $44 million, or 3 cents per share, in the first quarter ended March 31, from $6 million, or 1 cent per share, a year earlier.
On an adjusted basis and under a new accounting method, Chesapeake earned 14 cents per share, in line with analysts’ expectation, according to IBES data from Refinitiv. (3)
A copy of Chessy’s full 1Q19 update, with financials:
And finally, the latest slide deck, used on the conference call yesterday:
(1) Chesapeake Energy Corporation (May 8, 2019) – Chesapeake Energy Corporation Reports 2019 First Quarter Financial and Operational Results
(2) Seeking Alpha (May 8, 2019) – Chesapeake Energy Corporation (CHK) CEO Doug Lawler on Q1 2019 Results – Earnings Call Transcript
(3) Reuters (May 8, 2019) – Chesapeake sees growth from less-crowded Wyoming basin in second half
MDN editor Jim Willis was in his early 20s, working in the Ronald Reagan White House, when the movie St. Elmo’s Fire was released in 1985. Great song! Brings back memories. 🙂
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