Chesapeake Energy released fourth quarter 2011, and full year 2011 numbers on Tuesday. About one month ago Chesapeake announced they were curtailing 0.5 billion cubic feet (bcf) of gas production per day because of low commodity gas prices. At the time they threatened to up that number to 1.0 bcf. According to Tuesday’s announcement, they have made that adjustment. Chesapeake wants to save its gas to sell it when the prices go back up, and likely hopes that by taking a good amount of gas out of circulation, it will help drive up the historically low prices sooner rather than later.
In addition to curtailing current production, Chesapeake also announced they will spend 70 percent less on drilling in dry gas areas this year from last year.
From the relevant portions of the Chesapeake press release:
Chesapeake’s Leasehold and 3-D Seismic Inventories Total 15.3 Million Net Acres and 30.8 Million Acres, Respectively; Risked Unproved Resources in the Company’s Inventory Total 114 Tcfe; Unrisked Unproved Resources Total 352 Tcfe
Since 2000, Chesapeake has built the largest combined inventories of onshore leasehold (15.3 million net acres) and 3-D seismic (30.8 million acres) in the U.S. The company has also accumulated the largest inventory of U.S. natural gas shale play leasehold (2.2 million net acres) and now owns a leading position in 11 of what Chesapeake believes are the Top 15 unconventional liquids-rich plays in the U.S. – the Granite Wash, Cleveland, Tonkawa and Mississippi Lime plays in the Anadarko Basin; the Avalon, Bone Spring, Wolfcamp and Wolfberry plays in the Permian Basin; the Eagle Ford Shale in South Texas; the Niobrara Shale in the Powder River Basin; and the Utica Shale in the Appalachian Basin.
On its leasehold inventory, Chesapeake has identified an estimated 19.9 tcfe of proved reserves (using volume estimates based on the 10-year average NYMEX strip prices as of December 31, 2011 as compared to 18.8 tcfe using SEC pricing), 114 tcfe of risked unproved resources and 352 tcfe of unrisked unproved resources. The company is currently using 161 operated drilling rigs to further develop its inventory of approximately 39,200 net risked drillsites. Of Chesapeake’s 161 operated rigs, 125 are drilling wells primarily focused on developing unconventional liquids-rich plays, 34 are drilling wells primarily focused on unconventional natural gas plays and two are drilling conventional natural gas plays. By April 1, 2012, the company estimates it will be using 157 operated rigs, of which 131 will be drilling wells primarily focused on developing unconventional liquids-rich plays, while only 26 will be drilling wells primarily focused on unconventional natural gas plays and no rigs will be drilling conventional natural gas plays – the first time in the company’s nearly 23-year history it has not been drilling a conventional natural gas well.
The following table summarizes Chesapeake’s ownership and activity in its unconventional natural gas plays, its unconventional liquids-rich plays and other plays. Chesapeake uses a probability-weighted statistical approach to estimate the potential number of drillsites and unproved resources associated with such drillsites.
In recognition of the value gap between liquids and natural gas prices, Chesapeake has directed a significant portion of its technological and leasehold acquisition expertise during the past three years to identify, secure and commercialize new unconventional liquids-rich plays. To date, Chesapeake has built leasehold positions and established production in multiple unconventional liquids-rich plays on approximately 6.6 million net leasehold acres with 830 million bbls of oil equivalent of proved reserves, 8.3 billion bbls of oil equivalent (bboe) (or 50 tcfe) of risked unproved resources and 31 bboe (or 187 tcfe) of unrisked unproved resources based on the company’s internal estimates.
Curtailments of Natural Gas Reach Approximately 1.0 Bcf per Day of Gross Operated Production
In response to continued low natural gas prices and as an effort to help bring U.S. natural gas supply and demand into better balance, Chesapeake has demonstrated industry leadership by curtailing natural gas production to the upper level indicated in the company’s announcement on January 23, 2012. The company has now curtailed approximately 1.0 bcf per day of gross operated natural gas production, or approximately 1.5% of U.S. Lower 48 natural gas production. The curtailed volumes are located primarily in the Haynesville and Barnett shale plays. In addition, wherever possible, the company is deferring completions of dry gas wells that have been drilled, but not yet completed, and is also deferring pipeline connections of dry gas wells that have already been completed.
Company is Reducing 2012 Operated Drilling Capital Expenditures in Dry Gas Plays by Approximately 70% from 2011 Levels, Lowest Level Since 2005; 2012 Average Net Natural Gas Production Projected to Decrease 4% Year Over Year
The company continues to substantially reduce its operated dry gas drilling activity. By the 2012 second quarter, the company expects that its dry gas rig count will be reduced from an average of approximately 75 dry gas rigs used during 2011 to approximately 24 rigs, including 12 rigs in the northeastern portion of the Marcellus Shale, six rigs in the Haynesville Shale and six rigs in the Barnett Shale. Chesapeake’s operated dry gas drilling capital expenditures in 2012, net of drilling carries, are expected to decrease to $0.9 billion, a decrease of approximately 70% from similar expenditures of $3.1 billion in 2011 and the company’s lowest expenditures on dry gas plays since 2005.
As a result of production curtailments and reduced drilling and completion activity, partially offset by growth in associated natural gas production in liquids-rich plays, Chesapeake projects that its 2012 net natural gas production will average approximately 2.65 bcf per day, a decrease of 100 mmcf per day, or 4%, compared to the company’s 2011 average net natural gas production of 2.75 bcf per day.
Chesapeake to Double 2012 Operated Drilling Capital Expenditures in Liquids-Rich Plays; 2012 Average Net Liquids Production Projected to Increase More than 70% Year Over Year to Approximately 150,000 Barrels per Day
Chesapeake has reallocated capital from reduced dry gas drilling and deferred well completion and pipeline connection activities to its liquids-rich plays that offer superior returns in the current strong liquids price environment. This reallocation will result in a doubling of operated drilling capital expenditures compared to 2011 activities in Chesapeake’s liquids-rich plays, which include the Eagle Ford Shale, Utica Shale, Mississippi Lime, Granite Wash, Cleveland, Tonkawa, Niobrara, Bone Spring, Avalon, Wolfcamp, and Wolfberry. Chesapeake is increasing its operated drilling activity in liquids-rich plays by approximately 45% from an average of approximately 92 rigs used in liquids-rich plays during 2011 to an average of approximately 133 rigs in 2012. The company estimates that approximately 85% of its 2012 total net operated drilling capital expenditures will be invested in its liquids-rich plays.
As a result of continued strong operational results and increased drilling activity in liquids-rich plays, Chesapeake has increased its current liquids production to more than 110,000 bbls per day. The company projects that its 2012 net liquids production will increase by approximately 63,000 bbls per day, or more than 70% year over year, to an average of approximately 150,000 bbls per day. Additionally, Chesapeake projects that its liquids production will average more than 200,000 bbls per day in 2013 and 250,000 bbls per day in 2015. Relative to its liquids production rate of approximately 32,000 bbls per day in 2009, Chesapeake believes that its liquids production growth of approximately 220,000 bbls per day from 2009-2015 will represent the best track record of liquids production growth in the U.S. and one of the best track records of liquids production growth in the world during this period.
Chesapeake’s projected drilling activity and production in liquids-rich plays discussed above excludes the potential effects of planned 2012 asset monetization transactions associated with the company’s Mississippi Lime and Permian Basin assets discussed below.
As Previously Disclosed, Chesapeake Plans to Reduce 2012 Net Leasehold Expenditures by Approximately 60% Year Over Year
Having captured the largest U.S. oil and natural gas resource base during the past six years of new unconventional play identification and opportunity capture, Chesapeake is reducing its undeveloped leasehold expenditures. The company is now targeting to invest approximately $1.4 billion in net undeveloped leasehold expenditures in 2012, of which approximately 90% will target liquids-rich plays and 100% will be in plays where the company is already active. This compares to net undeveloped leasehold expenditures of approximately $3.5 billion and $5.8 billion in 2011 and 2010, respectively.
Company Provides Details on its Financial Plan for 2012
Chesapeake’s primary business goal is to continue creating at least $10 billion of shareholder net asset value each year through a strategy dedicated to growing its reserves and production and transitioning to a more balanced mix of liquids and natural gas production. As a result of this strategy, the company plans to make capital expenditures in 2012 and 2013 that will exceed its projected cash flow from operations. As previously disclosed in its press release dated February 13, 2012, Chesapeake is pursuing a financial plan to fully fund its anticipated capital expenditures during 2012 and provide additional liquidity for 2013. Furthermore, the company is also projecting that its rapidly increasing liquids production will enable it in 2014 to reach equilibrium between its cash flow from operations and its planned drilling and completion capital expenditures.
Chesapeake anticipates receiving total proceeds in March 2012 of approximately $2 billion in two separate transactions – a volumetric production payment on its Texas Panhandle Granite Wash assets and a financial transaction (similar to the company’s recent CHK Utica financial transaction) involving a new unrestricted subsidiary formed to hold a portion of Chesapeake’s assets in Ellis and Roger Mills counties, Oklahoma, in the Cleveland and Tonkawa plays.
In addition, the company is pursuing joint venture transactions in its Mississippi Lime and Permian Basin plays where it owns 1.8 million and 1.5 million net acres of leasehold, respectively. Chesapeake has also recently received industry inquiries about a complete exit from the Permian Basin and may consider a 100% sale of its Permian Basin assets if it receives a compelling offer. Chesapeake’s position in the Permian Basin is one of the largest in the basin, with leading positions in the Bone Spring, Avalon, Wolfcamp and Wolfberry plays. Chesapeake’s assets in the Permian Basin represent approximately 5% of the company’s total net proved reserves and current production. Chesapeake believes the Mississippi Lime joint venture, a Permian Basin transaction and various other minor asset sales could result in cash proceeds to Chesapeake of approximately $6-8 billion in 2012. The company is targeting completion of these transactions by the end of the 2012 third quarter.
Furthermore, Chesapeake anticipates monetization proceeds of approximately $2 billion during 2012 involving a portion of its midstream assets, oilfield services assets and miscellaneous investments, bringing estimated total monetization cash proceeds in 2012 to $10-12 billion. These proceeds are substantially in excess of the difference between the company’s expected cash flow from operations and its planned capital expenditures and would allow the company to achieve its previously announced debt reduction goals while providing additional financial strength during this current period of low U.S. natural gas prices.*
*Chesapeake Energy (Feb 21, 2012) – Chesapeake Energy Corporation Reports Financial and Operational Results for the 2011 Fourth Quarter and Full Year