Chesapeake Energy Corp. still has a way to go before it reaches optimal flying altitude, but CEO Doug Lawler has set the management team on a course designed to strip the portfolio to those that perform the best, which means more assets likely will be sold into 2014.
Lawler and his top executives shared their insights into third quarter results and expectations going forward during a conference call on Wednesday. A big focus continues to be on reviewing -- and perhaps tossing -- some of the massive acreage that Chesapeake has across the United States.
"The company still has a very significant leasehold," said Lawler. "As we are going through this process of evaluating where the capital will be allocated next year, some of that leasehold will continue to be developed. Some it will be tested for whatever technology or synergies that we can push to those areas to capture value in the future and some of the leasehold won't make it in our cut."
The evaluation includes current operations and "what we can do with it to get the best returns. It'll also include how technology and innovation can be applied, and in some cases, if it's very long-dated or we don't see getting to it, we'll actually sell it or relinquish it. So the leasehold position, the key there is we're not going to be a land-driven company."
Lawler, who took over the debt-laden company following the messy departure of Aubrey McClendon, set up internal teams tasked with bringing down operating costs by as much as 50%. He isn't backing down from what he wants to capture or relinquish from the plethora of assets in the portfolio.
"We see huge opportunity there, and that's something that's going to take place over time," Lawler said of reducing costs by half. It involves "capturing the innovation and the ideas of our field staff, the use of automation in our operations and all of the different things we have available to us. Competitive things, such as our data systems that we have here and in Oklahoma City, how we can optimize drilling and completion and production operations are all really, really exciting things that I believe will continue to help us on our production costs.
"So we have set some very aggressive targets...I'm encouraged by the progress the teams have made to date. But...we're not satisfied with it and we see huge opportunity there."
One area that Chesapeake's team already sees to reduce costs is through more multi-pad drilling. Today, almost 75% of the operated wells are on single pads. By the end of 2014, Lawler would like to see 75% on multi-pads.
"The single well pad drilling, the HBP focus to keep the leasehold and to continue to test the acreage that we have under lease initiatives, have been very significant in the past several years, but it has not been efficient," he told analysts.
"That said, we still have to demonstrate our ability in the core of the core to show higher quality better returns and offset the inefficient production growth decline that'll be taking place in the next few years" in part because of asset sales. "That really is the crux of the evaluation process and in how we're focusing where the capital can be directed to capture the best margins and the best returns and to continue to show and demonstrate competitive growth."
There aren't any firm forecasts for 2014 except for lower capital spending. The rig count now is at around 60, almost all oil and liquids directed. Where the count will be headed is part of another evaluation, particularly for high-impact areas like the oily Eagle Ford Shale.
"At present, we're in the 60-rig range and I think you can expect that through the rest of the fourth quarter," said Lawler. "As we look for to provide that guidance in 2014, we'll be more specific about ranges in the Eagle Ford and the other areas...What I can share with you is that we are focused on it very, very intently and making sure that the capital that we have to spend is absolutely directed at the best spot to provide the competitive growth metrics that we believe we need to achieve."
Chesapeake is at the "beginning stages" of the efficiency drive that has been a highlight of the exploration industry. The Oklahoma City operator hasn't been able to capture those gains seen by its peers.
"Frankly, we have not been able to do it up to this point in time because we've been more focused on how to hold the leases," said the CEO. "So this is a huge opportunity for us, huge in respect to cost, huge in respect to estimated ultimate recovery...But I'll also note that there isn't anything out there in industry that's taking place that Chesapeake has not tried or participated in."
The company today has about 500 wells in its backlog. Whether it will remain as high going forward depends on the rig count in an area, infrastructure and plans to optimize them, Lawler said.
Our commitment is that we're not going to park capital in the ground for nine months, 12 months, 15 months or greater without being able to get a return on it. So I would, rather than look at what the optimum level of inventory is, I'd focus that what we're going to do is get the greatest returns from the investments and not strand that capital in the ground."
After losing $2.06 billion in 3Q2013 from a writedown on the value of its natural gas assets, Chesapeake turned to a profit in the latest period of $156 million (24 cents/share). It also sold $3.6 billion in assets to date this year and anticipates closing another $600 million in the final three months of this year. Revenues jumped 64% from a year earlier to $4.87 billion, significantly higher than Wall Street's consensus of $3.85 billion, mostly on increased oil sales and lower gas volumes.
On the production side, gross oil output led the way, up 23% year/year, with total production growth on an organic basis and adjusted for asset sales up 8%. Net oil output in the quarter increased to 120,000 b/d, about 4,000 b/d more sequentially.
"This is despite the sales of assets in the Mississippi Lime and northern Eagle Ford Shale that contributed approximately 15,000 net b/d of oil in the second quarter," Lawler noted.
Natural gas production fell from a year ago to 273 Bcf from 302 Bcf and now accounts for 73% of total production versus 79% a year ago. Oil production accounts for 18% versus 14%, while natural gas liquids, with production totaling 5.4 million bbl versus 4.1 million bbl, now is about 9% of total output, 2% more than in 3Q2012.
Oil growth primarily was from the Eagle Ford, and to a lesser extent, the Utica Shale, Mississippian Lime and in the southern part of the Marcellus Shale. The percentage of production from liquids plays increased to 27% and the percentage of realized revenue was 65%.
"We expect a continuation of this trend, due to the ongoing ramp up in the Eagle Ford and the Utica and the continued focus of our capital program on liquids drilling," said the CEO.
Because of the better-than-expected oil production results in the period, the full-year 2013 oil output outlook was increased by 2 million bbl to 40-42 million bbl. The guidance implies a projected decrease in oil output from 3Q2013 by about 9,000 b/d because Chesapeake plans to bring its Eagle Ford production back to "normal" after accelerating between July and September.
CFO Nick Dell'Osso noted that the company is in a much better position liquidity-wise today than it was a year ago with almost $5.2 billion of liquidity that consists of $4 billion in an undrawn corporate revolver and $215 million available for its oilfield services revolver. It also has about $1 billion of unrestricted cash. "Our liquidity position improved by approximately $430 million compared to the end of the second quarter and by approximately $840 million from year-end 2012...Long-term debt net of cash ended the quarter at $11.7 billion, down from $12.4 billion at the end of the second quarter and $12.3 billion at the end of the year."