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Chesapeake Forecasts Decline in Natural Gas Production As Oil Focus Sharpens

Chesapeake Energy Corp. turned in its best financial performance in more than three years during the first quarter as cost cutting continued and the shift to an oilier production mix progressed. 

With $9.4 billion of principal debt on the books at the end of March, CEO Doug Lawler keeps pushing his capital discipline mandate as the company continues to explore divestitures across its vast portfolio to shave off another $3 billion this year. But one of the high level stories during the quarter was stronger oil production and the boost those volumes got from better commodity prices.

“From this point forward, we forecast a modest decline in gas volumes, replaced in the total with oil volume growth as we approach the end of the year,” CFO Nick Dell’Osso said on Wednesday during an earnings call with financial analysts. “Our investments are focused on increased margins and returns. This production profile highlights that we are seeing our capital allocation process deliver the results intended in the current commodity price environment.”

The company, long a natural gas-focused producer, has shifted to an oilier mix in recent years to help strengthen the balance sheet. While the Eagle Ford Shale has been the company’s oil engine, churning out 61,000 b/d in the first quarter, management has been intently focused on the Powder River Basin’s (PRB) Turner formation, a tight sands oil play in Wyoming.

Chesapeake is testing reduced spacing in the Turner, placing six wells to sales at intervals of 1,980-2,300 feet apart during the first quarter. Management said it is “encouraged” by the results so far, as one of the wells spaced at 1,980 feet has produced 2,000 boe/d after 18 days on production. The company produced 7,000 b/d of oil in the PRB in the first quarter.

“Once we get the spacing tests completed, we’ll have a better handle on what our running room is in the Turner; it could expand substantially,” said Executive Vice President Frank Patterson, who oversees exploration and production. “We told you at analyst day that we could be rivaling the production out of the Eagle Ford relatively quickly, and we’re on track with that. Actually, we’re just a tad ahead of where we said we were going to be.”

The company plans to turn-in-line 35 PRB wells by the end of the year. It tested its first Turner well more than a year ago. After roughly 400 days of production, Lawler said that well averaged more than 500 b/d of oil and 1.5 MMcf/d of natural gas last month. Cumulatively, the well has produced 345,000 bbl of oil and 622 MMcf of natural gas.

The company is currently running four rigs in the Turner, Patterson said. Management is still considering adding a fifth rig for the PRB that would work in one of the basin’s other myriad formations, such as the Parkman, Sussex, Niobrara or Mowry.

Meanwhile, in the Utica Shale of Ohio, Chesapeake has been testing different completion methodologies, including increased spacing and longer laterals, that have significantly increased historical results. The tests, management said, could bode well for the company's future in the play.

Chesapeake produced 554,000 boe during the first quarter, up from 528,000 boe in 1Q2017 but down from the 593,200 boe it produced in 4Q2017. The company continued selling assets in the first quarter and closed on a $387 million sale in the Midcontinent. Another deal there to sell $60 million of assets closed last month too.  

Overall, Chesapeake produced 92,000 b/d of oil during the first quarter, up from 84,000 b/d in 1Q2017. Natural gas production also increased to 2.5 Bcf/d from 2.3 Bcf/d.

The company’s average daily sales price increased to $27.27/boe in the first three months of the year, up from $24.13/boe during the same time last year. Revenue was down slightly over the same period, falling to $2.5 billion from $2.8 billion.

Chesapeake reported net income of $268 million (29 cents/share) for the first quarter, compared to net income of $75 million (8 cents) in 1Q2017. 

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