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Chesapeake Looks to Portfolio for Gains As Selling Spree Ends With Utica Divestiture

Chesapeake Energy Corp. CEO Doug Lawler said Wednesday that last week’s $2 billion Utica Shale divestiture “marks the conclusion” of the company’s “strategy of asset sales being the primary driver of debt reduction,” as management plans to lean on other parts of the portfolio and gains from the resurgent Powder River Basin (PRB) to strengthen the balance sheet.

Under Lawler, the company has for years now been on a cost-cutting binge, dumping well over a quarter of its oil and gas assets. Over the last five years, a series of divestitures and other measures have helped eliminate $12 billion in total leverage and billions of dollars more on other expenses.

“That strategy was necessary given the debt-profile of the company,” Lawler said of the sales focus. “Going forward, organic production growth, exploration, strategic acquisitions and portfolio management will drive us to achieve our ultimate goal of improving leverage ratio.”

While $9.7 billion of principal debt remains on the company’s books, proceeds from the Utica sale, a play the company helped pioneer, will help it retire $2 billion more of outstanding financial obligations. The sale is expected to close before the end of the year.

Chesapeake, long a natural gas-focused producer, has shifted to an oilier mix in recent years. While the Eagle Ford Shale of South Texas has helped drive those gains, the company has been increasingly focused on the Turner formation, a tight sands oil play in Wyoming. The PRB is garnering attention from other producers. For example, Anadarko Petroleum Corp. discussed appraisal efforts there during a second quarter earnings call on Wednesday.

For Chesapeake, the play is “quickly establishing itself as the growth engine of the company.” PRB production has increased 78% from 4Q2017, reaching a new record in July of 32,000 boe/d, with a 42% oil cut. The company now projects that production from the PRB will reach 38,000 boe/d in the coming months and expects production to double there next year compared to 2018 volumes.

It recently placed five Turner wells on production with initial production rates ranging from 1,500 boe/d to 3,200 boe/d, with oil representing 65% of those volumes.

Overall, the company is targeting adjusted year/year oil growth of 10% in 2019, with even more expected in 2020. Growth in oil, particularly from the PRB, Chesapeake said during its second quarter earnings call on Wednesday, should help replace the earnings that were divested in the Utica sale.

The company is now running five rigs in the PRB that are all focused on the Turner. It is also considering adding a sixth rig and said it remains encouraged about other formations in the basin, such as the Teapot, Parkman, Niobrara, Sussex and Mowry, among others.

In the Niobrara, Lawler said wells have historically been under-stimulated and drilled on very tight spacing. Going forward, Chesapeake plans to upspace, drill longer wells and finish them with larger completions. The company also only has three wells in the Parkman, a shallower sandstone that’s likely to be developed as the Turner has with light stimulations, Lawler said.

The Sussex also looks promising, he added, while Chesapeake still needs to test the Mowry oil window. It has drilled a shorter gas well in the formation that management said performed fairly well.

“The inventory is long and deep. We are seeing opportunities to stack on almost every single section we operate,” Lawler said. “We’re just getting started, so things are going to change.”

The company still remains committed to its other positions across the U.S. onshore in Pennsylvania’s Marcellus Shale, the Midcontinent and the Eagle Ford and Haynesville shales.

The company placed 48 Eagle Ford wells to sales in the second quarter. It also continues to appraise liquids-rich opportunities in the Midcontinent area of Oklahoma. In the Marcellus, which Chesapeake called a “significant cash flow generator,” the company drilled its longest lateral to date in the lower portion of the formation to 13,380 feet. It’s also drilling an even longer 14,500-foot lateral there.

As it focuses on reducing leverage, increasing margins and reaching cash flow neutrality, the company is in search of attractive properties to acquire, said CFO Nick Dell’Osso. 

“There’s nothing in front of us, we’re not ready to execute on anything today; it’s just prudent for us to be cognizant of it,” he said of opportunities on the market. “We recognize the power that it can have to our financial performance over time if you can check all the right boxes, that being that it's the right value, that you will add incremental value to it with synergies and that you can finance it appropriately."

Chesapeake produced 530,000 boe/d in the second quarter, up 8% from 2Q2017 when adjusted for asset sales. Production slightly missed the Street’s expectations of 534,000 boe/d on lower natural gas production. The period’s production was down from 554,000 boe/d in 1Q2018.

The company reported a second quarter net loss available to common stockholders of $40 million (minus 4 cents/share), compared to 2Q2017 net income of $470 million (47 cents). Second quarter revenues were flat with the year-ago period at about $2.3 billion.

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