Chesapeake Energy Corp. will be a natural gas-weighted producer for the foreseeable future, but in the coming years expect to see an evolution to liquids-rich plays, the company said this week.

Total production in 2Q2010 rose 14% to 2.79 Bcfe/d from a year ago. Average natural gas output in the latest quarter rose 8% sequentially from 1Q2010 to 2.59 Bcf/d. Liquids production, which still only comprises around 10% of Chesapeake's total output, was up 41% year/year and was responsible for 17% of realized gas and liquids revenue in the quarter, the company reported.

"In recognition of the significant and persistent value gap that has developed between natural gas and oil prices, Chesapeake has accelerated its transition to a more liquids-rich asset base," the company said. "A significant portion of its technological, geoscientific, leasehold acquisition and drilling expertise" has been redirected "to identifying, securing and commercializing unconventional liquids-rich plays."

The Oklahoma City-based driller, which made its fortune and built its reserves in onshore shale gas plays, now has a leasehold in 12 "disclosed and several undisclosed liquids-rich plays." An estimated 2.4 million net acres of leasehold in liquids-weighted plays hold an estimated 3 billion boe (18 Tcfe) of risked unproved resources and 8.2 billion boe (49 Tcfe) of unrisked unproven resources.

Chesapeake plans to shift about $400 million of its projected 2011 capital spending to liquids plays from natural gas plays. On a net basis, after joint venture (JV) carries, the company plans to keep 2011 spending flat compared with this year at $4.5-4.6 billion. Also expect the company to become a "significant seller of leasehold in the second half of 2010 and 2011 through planned joint ventures," said CEO Aubrey McClendon.

"Chesapeake's goal is to reach a balanced mix of natural gas and liquids revenue as quickly as possible," he said. "We plan to shift our capital spending mix between natural gas plays and liquids-rich plays to approximately 45/55 by year-end 2012. By year-end 2015, we expect to increase our liquids production to approximately 200,000 b/d, or approximately 25% of total production and 40% of production revenue.

"This will be a remarkable achievement for a company of our size, one that we expect to deliver to our investors from organic drilling, rather than through acquisitions, at very low per net acre leasehold acquisition costs and low drilling and completion costs."

To accomplish its long-term goals, gas drilling will be reduced except in held-by-production leases, to use a drilling carry provided by a JV partner -- or until gas prices are above $6/Mcf.

Instead Chesapeake wants to lease and develop new liquids-weighted plays where it can acquire "very large" positions of 250,000-750,000 net acres. Within one year of entering the new plays, it plans to sell a minority interest in the leasehold to help fund future drilling costs.

Liquids drilling now is expected to accelerate until the end of 2015 when the company's drilling expenses are balanced equally between gas plays and liquids plays, it said. It also wants to continue to add 2.5-3 Tcfe of proved reserves annually.

McClendon said the company can accomplish its goals "without the issuance of additional equity and with a reduction of debt levels such that the company becomes investment grade within the next few years."

Net income totaled $235 million (37 cents/share) in 2Q2010, down from $237 million (39 cents) in the year-ago period. Operating cash flow was $1.13 billion in the latest quarter, versus $1.01 billion a year earlier.

Average prices realized in the latest quarter were $5.66/Mcf and $61.43/bbl, for a realized natural gas equivalent price of $6.14/Mcfe. In the year-ago period Chesapeake's realized average prices were $5.56/Mcf and $56.72/bbl, or $5.89/Mcfe.

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