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Chesapeake Doubles Gas Shut-ins to 400 MMcf/d

Chesapeake Energy Corp. is shutting in more natural gas production because of continued low wellhead prices, the producer said Thursday. Plans are to curtail 400 MMcf/d (gross), which is twice as much as Chesapeake began to defer in early March (see NGI, March 9).

The increased gas shut-ins represent around 13% of Chesapeake's total current gross operated production capacity. The wells that have been curtailed primarily are located in the Midcontinent and in the Barnett Shale.

Until natural gas prices are stronger, the company not only plans to shut in 400 MMcf/d of gas, but it also plans to limit production from "most newly completed wells" in the Barnett and Fayetteville shales to 2 MMcf/d and in the Marcellus and Haynesville shales to 5-10 MMcf/d.

"As a result of recession-related reduced demand and abundant U.S. production, natural gas prices have remained soft in recent months," said CEO Aubrey McClendon. "However, we believe substantially lower drilling activity and natural reservoir depletion will work to rebalance U.S. natural gas markets by late 2009 or in early 2010. This recovery is already partially reflected in the Nymex [New York Mercantile Exchange] natural gas forward strip, but we believe it will become much more pronounced in the months to come as U.S. natural gas production declines begin to accelerate and the economy begins to recover.

"Our analysis indicates that the incremental returns for deferring revenue to future periods are very attractive and may in fact become exceptional once demand recovers and the Nymex curve increases," he said.

"Chesapeake's strong financial condition and extensive hedges provide us with the operational and financial flexibility to make prudent natural gas revenue maximization choices," McClendon said. "Additionally, Chesapeake and other producers remain well positioned to readily meet increased market demand for natural gas as the economy recovers and as power generation and transportation markets further expand their use of natural gas in the years to come."

Unlike its gas curtailments, the Oklahoma City-based driller said it resumed producing 7,000 b/d of oil from previously shut-in oil wells.

The latest shut-ins by Chesapeake could be a preview of other gas producers' plans in the coming months. Last week Raymond James & Associates Inc. forecast 500-750 Bcf would be shut in this summer (see related story).

Energy analyst Dan Pickering of Tudor, Pickering, Holt & Co. Securities Inc. (TPH) said it appears Chesapeake "draws a line in the sand at $3.50/Mcf" based on gas prices at the New York Mercantile Exchange. If the shut-ins are extended through June, Chesapeake's quarterly output would fall 4% year/year (y/y), said Pickering. If it also were to shut in the output through 3Q2009, Chesapeake's production would fall an estimated 1% y/y, he said.

"It does potentially take 75 Bcf out of gas market/storage," said the TPH analyst of Chesapeake's production deferrals.

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