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Chesapeake Readies New Strategy with Growing Output

Chesapeake Energy Corp., with a new CEO leading the way, is beginning a new era for the company as well, moving away from spending to secure big leaseholds in the onshore to living within its cash flow.

CEO Doug Lawler, who took the helm in June, talked with analysts about how Chesapeake will become an income generator as opposed to a debt-ridden operator beginning in 2014.

It's no longer about grabbing the biggest position in the biggest plays, the former Anadarko Petroleum Corp. executive said. Living within cash flow now is be the name of the game, something that hasn't been done since 2001. That may entail asset sales, but it's a priority to develop what's on the shelf instead of continuing to add acreage, he said.

"A comprehensive company-wide review of our capital allocation and other processes is under way," Lawler said, "and I believe these initiatives will result in substantial further improvement in both near-term and long-term capital efficiency and returns."

The efficiency initiatives already are coming into view, as Chesapeake drops rigs through the rest of the year. The operator ran on average 76 rigs in 2Q2013, seven less than in the previous quarter, and it invested about $1.6 billion in drilling and completion costs. However, Chesapeake spud a total of 312 wells and completed 410 wells in the latest period, up from 294 wells spud and 352 wells completed in 1Q2013.

Sixty-four rigs on average are planned through December, well below the 81 rings that were running from January through June. Plans are to drill about 20% fewer wells from July through December than in the first six months. Chesapeake also cut full-year guidance for drilling and completions to $5.7-6 billion from $5.75-6.25 billion.

Most of the production gains between April and June came from the Eagle Ford Shale, where Chesapeake connected 140 wells to sales from 111 in the year-ago period. Net production averaged 85,000 boe/d, 135% more than a year earlier and 14% more than in 1Q2013. Fifteen rigs now are running in the South Texas play, but there are plans to bring that number down to 10 by the end of this year because of efficiency gains.

Also showing promise is the Utica Shale, where Chesapeake is running 11 rigs across acreage in eastern Ohio, Pennsylvania and West Virginia. Net production averaged 85 MMcfe/d in the quarter, 48% more sequentially. The average peak daily production rate of the 42 wells that started up in the period was 6.6 MMcfe/d.

One rig is to be dropped in the Utica by the end of the year, also on efficiency gains. Average spud-to-cycle time in the latest quarter was 18 days, down from 26 a year ago. At the end of June Chesapeake had drilled 321 wells, including 106 producing wells, 93 additional wells waiting on pipeline connection and 122 wells in various stages of completion.

There's also steady liquids output growth in the Greater Anadarko Basin, which includes parts of Oklahoma, the Texas Panhandle and southern Kansas, in five primary plays: the Mississippian Lime, Granite Wash, Cleveland, Tonkawa and Hogshooter. Aggregate net production in 2Q2013 averaged 126,000 boe/d, 43% year/year and 11% higher sequentially.

Chesapeake now is running 26 rigs across the leasehold, but that's to drop to 19 by the end of December. At the end of June, there was an inventory of 58 drilled but uncompleted and/or unconnected wells in the basin.

Meanwhile, output in the Marcellus shale continued to grow in the quarter, "benefiting from the availability of downstream takeaway capacity and the completion of wells in backlog," Chesapeake said. It connected 131 wells to sales, more than double the 52 wells connected between January and March.

Average daily net production in the northern dry gas portion of the Marcellus was 780 MMcfe/d in the latest period, 58% more than a year ago and 11% more sequentially. Chesapeake's now running five rigs in the northern section, and it's expected to hold that level through the end of the year. It had an inventory of 144 drilled but uncompleted and/or unconnected wells in the northern Marcellus at the end of June.

Production in the southern wet gas portion of the Marcellus averaged 208 MMcfe/d in 2Q2013, up 56% year/year and 23% higher sequentially. Three rigs now are working the acreage, but one rig is to fall by year's end. Chesapeake had an inventory of 76 drilled but uncompleted and/or unconnected wells in the southern Marcellus.

Total natural gas and oil production in the latest quarter increased 7% year/year to 4.1 Bcfe/d, and it was 2% higher than in 1Q2013. Average daily production consisted of 3.1 Bcf of natural gas and 168,000 bbl of liquids, comprised of 116,000 bbl of oil and 52,000 bbl of natural gas liquids (NGL).

The turn to oil from its natural gas portfolio paid off, with oily production increasing 44% and up 12% sequentially, leading Chesapeake to lift guidance by 22-28% higher from 2012 by 1 million bbl to a range of 38 million to 40 million bbl.

Liquids accounted for 25% of total production in the quarter, up from 21% in 2Q2012, but it's still well below Chesapeake's gas-weighted output. Average NGL output was up 5% from a year ago but it was down 4% from the first three months of this year, primarily on "increased ethane rejection," said COO Steve Dixon.

Chesapeake has reduced its 2013 NGL guidance by 2 million bbl to 21-23 million bbl, reflecting the continuing pressure on ethane, "as well as anticipated delays associated with third-party gathering, compression and processing in the Utica Shale," Dixon said.

Net earnings in 2Q2013 came in at $580 million (66 cents/share), down from $972 million ($1.29) in the year-ago period. Excluding one-time gains/losses, profits per share were 10 cents higher than average Wall Street expectations. Operating cash flow climbed 53% from 2Q2012 to $1.37billion.

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