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Both Oil, Natural Gas Assets Still on Table as Chesapeake Continues Divestments

Chesapeake Energy Corp. won’t discriminate between its oil and natural gas properties this year as it looks to keep unloading assets in an ongoing quest to get leaner and cut another $2-3 billion of debt from its balance sheet.

The producer, which today operates primarily in the Midcontinent, Eagle Ford and Haynesville shales, along with the Powder River and Appalachian basins, continues to host discussions with third parties that are interested in acquiring both large and small chunks of its portfolio. Although the company has divested about 25% of its wells in recent years, cut capital expenditures by 83% in the last five and last year reduced outstanding secured term debt by $1.3 billion, financial discipline remains a top priority for the management team.

“...We are value agnostic, return agnostic; we want to drive the highest value and highest returns, and if opportunities arise to sell out of an oil asset...those are things we will continue to consider,” said CFO Nick Dell’Osso during a call on Thursday to discuss year-end financial results. Discussions are ongoing about possible sales across the portfolio that can “materially improve the balance sheet,” regardless of whether they’re oil or gas assets.

While financial metrics continue to improve, the company remains leveraged, with nearly $10 billion of principal debt on the books. CEO Doug Lawler said smaller transactions are still “heavily price-dependent,” with confidence lacking in current strip prices and little appetite evident for larger acquisitions in the broader market. That, he acknowledged, has made prudent divestitures more challenging. While focused on ditching assets with minimal cash flow, management has not ruled out selling one of the major assets.

With the new year well underway, Chesapeake remains more oil-focused and plans to spend less. The company said it would spend $1.975-2.375 billion for capital expenditures this year, or 12% less than it did in 2017.

Chesapeake did not offer a detailed breakdown of spending. But it plans this year to bring up to 140 wells online in the Eagle Ford Shale, more than anywhere else in its portfolio. The Eagle Ford is the company’s self-described oil-growth engine, where it currently is most active with five rigs running.

In the Powder River of Wyoming, a leasehold once for sale that Chesapeake returned to in 2016 to help lift oil volumes, four rigs are running, with plans to add a fifth later this year. Chesapeake intends to bring on 33 wells this year and mostly develop the Turner formation, a tight sands oil play with a history of robust drilling.

“What you’re going to see in 2018 is basically a Turner-focused program in the Powder. We are getting wells out faster and cheaper,” said Executive Vice President Frank Patterson, exploration and production chief. “Every time we go out, we’re tweaking the completions, so it’s getting more and more competitive each day.”

The fifth rig could eventually work on the oily Sussex or Niobrara formations, but management hasn’t decided yet.

“We can make those wells a lot more economic with new completion designs and longer wells, that’s the direction we will head,” Patterson said of the Niobrara. “It is not as competitive today as the Turner. So, we’re going to focus on what the greatest value is today. I think Turner becomes very valuable to us in the not-to-distant future.”

Chesapeake brought on a Turner well in the gas condensate window in December with a lateral length of 10,100 feet that reached a peak production rate of 2,600 boe/d. The well is currently producing 2,000 boe/d, with a 45% oil cut, after 80 days on production. A seventh Turner well is scheduled to be placed into sales next week.

In Louisiana’s Haynesville Shale, Chesapeake placed its first-ever Bossier well online with a lateral length of 10,000 feet that achieved a peak production rate of 35.8 MMcf/d.

In the Marcellus, the company plans to hold this year’s production flat with 2017 levels of 2.1 Bcf/d. The company also has rigs running in both the Midcontinent and Ohio’s Utica Shale.

Overall, Chesapeake plans to run up to 16 rigs across its portfolio this year.

The company produced 593,200 boe/d in the fourth quarter, up 15% from the year-ago period after adjusting for asset sales. Full-year volumes increased 3% from 2016 after adjusting for divestitures to 547,800 boe/d.

Chesapeake reported fourth quarter net income of $334 million (33 cents/share), compared with a net loss of $341 million (minus 83 cents) in the year-ago quarter.

Better commodity prices across the board helped to lift revenue to $9.5 billion in 2017 from $7.9 billion in 2016. The company reported full-year net income of $953 million (90 cents), compared to a net loss of $4.3 billion (minus $6.43) in 2016. Last year’s steep loss was primarily related to oil and gas property impairments, hedging losses and exit costs related to the sale of its Barnett Shale assets

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