Chesapeake Energy Corp. warned Tuesday that its natural gas pricing differentials in parts of the Marcellus Shale during the second quarter and into July weakened relative to the Henry Hub benchmark and were "significantly wider than forecast."
In an update before release of its quarterly results set for next week, the Oklahoma City independent issued information about differential pricing issues in the northern region of the Marcellus. A package of dry gas assets in southwest Pennsylvania is being marketed, and management has said it might consider more asset sales in Appalachia (see Daily GPI, May 19).
Chesapeake said realized gas prices after gathering, transport, and basis on production in the Marcellus northern region averaged $2.47/Mcf below Henry Hub, versus 18 cents/Mcf in 1Q2014.
At some delivery points during the period, particularly at Dominion South, Texas Eastern Transmission Corp. M2, Tennessee Gas Pipeline Co. LLC Zone 4 and Transcontinental Gas Pipeline Co. Leidy, basis discounts to Henry were between 92 cents/Mcf and $2.32/Mcf in the latest period.
"As a result, the realized price after gathering, transportation, and basis on...Marcellus North natural gas production (approximately 29% of total company natural gas production), is expected to average $2.47/Mcf below Henry Hub during the 2014 second quarter, compared to an average discount of 18 cents/Mcf that the company received for its Marcellus North production during the 2014 first quarter."
The companywide gas price differential is expected to average $1.91/Mcf for 2Q2014, and the realized gas price after hedges should average $2.45/Mcf. Those prices compare with 1Q2014's companywide differential of $1.08/Mcf and a realized natural gas price after hedges of $3.27/Mcf.
Realized natural gas liquids (NGL) prices in 2Q2014, after processing and transportation costs, are seen at $21.03/bbl on average, compared to an average realized price of $29.23/bbl in 1Q2014.
"The decrease in NGL price realizations during the 2014 second quarter was primarily due to weakness in ethane prices and lower seasonal demand for propane and butane," the company said.
Chesapeake's average NGL price/bbl as a percentage of the average West Texas Intermediate (WTI) crude oil prices, before processing and transportation costs, is expected to be 34% for the period, compared to 47% realized during 1Q2014.
Realized oil prices in the latest period, after hedging, processing and transportation costs, was $85.23/bbl, compared to an average realized price of $85.08 in the first three months of this year. The differential to the average WTI crude oil price was on average $5.50/bbl in the quarter, versus $5.08 in 1Q2014.
The increase in the differential primarily was driven "by a temporary outage of a third-party crude oil pipeline and a contraction in the premium between Louisiana Light Sweet crude oil prices, the benchmark for all of Chesapeake's Eagle Ford Shale production and WTI prices during the second quarter," the producer said.
Wells Fargo Securities analyst David Tameron said the near-term focus for analysts will be on Chesapeake's (CHK) second quarter pricing, which was included in news that the company is building its position in the northern part of the Powder River Basin.
"Northeast pricing weakness for 2Q2014 across all companies is expected by the Street, but CHK's update highlighted the quarter's challenges," Tameron said. "We were in line with Street earnings per share at 49 cents for the period...but updating pricing alone would bring us down 4 cents/share."