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Chesapeake Tightens Belt, Lays Off 800

October 14, 2013
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More than 800 Chesapeake Energy Corp. employees were laid off last week as CEO Doug Lawler continued to make over the company that Aubrey McClendon built (see related story).

The biggest cuts -- 640 -- were from the headquarters in Oklahoma City. The layoffs were indiscriminate, with staff reductions in land, operations, information technology, human resources, legal, facilities, acquisition/development and financing/accounting, Lawler told employees in an email. The former Anadarko Petroleum Corp. executive, who took over in June, made financial discipline his top priority and said he planned to complete a restructuring of the 12,000 member staff by Nov. 1 (see NGISept. 19). Former lieutenants of co-founder McClendon were fired in August, and executives from Anadarko were installed (see NGISept. 3).

Anadarko, a larger enterprise and a better performer stock-wise than Chesapeake, had 5,200 employees at the end of 2012. Since Lawler came aboard in June, Chesapeake's share price has risen about 20%. Since former CEO McClendon stepped aside in March, the stock has risen close to 40%.

The past few months have proved "very challenging as we have evaluated the competitiveness of the company," Lawler told employees in an email last Tuesday. "The organizational restructuring targeted to be complete by November 1 has concluded, and the initial transformation work is finished. By scaling E&P support services, reducing management layers and aligning resources with a sharpened focus on accountability and efficiency, we have created a business built to deliver a sustainable and profitable future."

Eligible employees terminated were offered severance packages that included three months' pay, 100% acceleration of equity and lump-sum health insurance payment and outplacement services. Lawler's "transformation teams," he said, have been evaluating all aspects of the business. More than 75 cross-functional leaders were involved in the restructuring process.

Chesapeake investor relations chief Jeff Mobley said the company had reached an inflection point "so we can rapidly shift toward improving efficiencies." Among other things, Chesapeake already had planned to sell $4-8 billion worth of assets this year; sales agreements have been reached already for the "low end" of the guidance.

"We are going to focus on a smaller, more focused set of operations and have projects compete for capital," Mobley said at a Deutche Bank conference. "One of the things that is really true about the oil and gas business is the personnel that work in companies derive their work on whether or not wells are getting drilled...If they have a rig on their assets and if you're an asset manager, you're a geologist, you're a geophysicist, you're an engineer, if those are not assets in your area...either you are going to go work somewhere else or you're going to figure out how to make your project more competitive. You're going to figure out how to get reserve recoveries up, you are going to figure out how to get cost down and you're going to get cycle times better..."

Chesapeake "can't outrun infrastructure," he said. "There may be some very valuable acreage left in small portions in core areas; there maybe a few binding constraints with respect to some financial structures that we previously put in place, but by and large you can see a strong competition for capital and a focus on returns."

The operator now has the ability to reduce costs substantially and generate more immediate rates of return, Mobley said. This year alone, Chesapeake has reduced its total capital expenditure outflow by about 46% and is most focused on E&P.

Leasehold spending has been reduced to about $350 million for 2013, while drilling/completion costs of $1 billion this year "could easily be reduced by half next year, as we continue to focus our capital on just our core E&P operations...

"If you just look at 2010 through 2012, about 75% of our drilling program was single-well pads...and by next year it will probably be 20-25%. Meaning that 75% or so of next year's drilling program can be our multi-well pad, where we can reduce well costs by 15-30% and we can greatly reduce the cycle times."

The operator's completion and cycle times also are going to be more efficient, said Mobley.

The Eagle Ford Shale is a good example, he said. "Today we have about 10 rigs in the play. That's down from probably 20 rigs or so of roughly a year ago and some of that is from asset sales...but through better cycle times..."

In the Utica Shale, Chesapeake takes credit for about 70% of the drilling to date. "We've drilled more than 300 wells...It's approaching 350 wells to date, and just over 100 wells are in production and most of those are at restricted rates. But as the processing capacity gets put in place, we'll be able to ramp up production through the end of the year."

The Marcellus Shale, where Chesapeake is a leading operator, "illustrates our opportunity set in the whole company," said Mobley. Chesapeake has about 100,000 net acres in the Marcellus, according to Mobley, which represents about 1,000 drilling locations and up to 10 years of drilling inventory.

"This is where our opportunity set for our portfolio improvement really takes hold. For example, if were to drill wells, say in Bradford County [PA], that could be a 5-7 Bcf well." However, if all of Chesapeake's drilling program were focused only on high-grade areas of the play instead of a wider ranging area, the wells "could easily be wells that are 9-12 Bcf and that's where the focus of our drilling program will be."

Chesapeake also will have more accountability, Mobley told the audience. "We're implementing a...compensation system designed on pay-for-performance...Underestimating is just as bad as overestimating in our new performance system...We're incentivizing predictability in our business model going forward."

Unlike McClendon's go for broke strategy to secure the top position in almost every onshore basin, "if there's a new play to pursue, a new opportunity to achieve, it's going to have to compete for capital and knock something out, rather than just adding to the overall program," based on a "concept of substitution rather than addition."

Chesapeake, said Mobley, has been reorganized into two business units, one supported by drilling and technology, the other by delivering financial performance. So far this year Chesapeake has reduced its capital expenditures about 46% year/year and is more focused on E&P, versus midstream and other operations. It's all about efficiencies today.

Oklahoma Gov. Mary Fallin, who has worked with Chesapeake on natural gas issues, including transportation, said Tuesday was "a difficult day for Chesapeake and for the hundreds of workers who have been released...It is my hope these men and women -- all of whom are skilled, hard-working professionals -- choose to stay in Oklahoma. We have a strong, vibrant energy sector, and there are many other companies that may be able to offer employment to former Chesapeake employees."

Besides Chesapeake, Devon Energy Corp. is one of the biggest employers in Oklahoma City. SandRidge Energy Inc. and Continental Resources also are based in Oklahoma City. Williams is headquartered in Tulsa.

"Moving forward, we know that Chesapeake isn't going anywhere," said Fallin. She said Lawler, who had been in Houston before moving to Oklahoma City this past summer, told her the company planned to remain headquartered in Oklahoma "and does not have plans for any more layoffs." 

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