Chesapeake Energy Corp. is poised to transform its production profile to seize the momentum it gained in 2018 to continue boosting oil volumes, with this year’s capital expenditures mainly being directed to the Powder River Basin (PRB) and the Eagle Ford Shale to drive that growth.
The company capped its shift away from gassier assets last year by exiting the Utica Shale and divesting dryer assets in the Midcontinent for about $2.5 billion. Meanwhile, the $4.4 billion acquisition of East Texas-focused WildHorse Resource Development Corp. found it padding its self described oil growth engine in the core Eagle Ford of South Texas with more assets farther northeast in the Upper Eagle Ford and Austin Chalk formations. The company has aggressively set out to work the WhiteHorse assets, most of which are undeveloped.
“We’re super excited by what we see,” CEO Doug Lawler said of the Whitehorse properties during a year-end earnings call on Wednesday. “What we see on the drilling and completion side is immediate opportunity and service-related cost, as well as supply chain synergies, as we integrate it into the Chesapeake machine.”
Chesapeake has announced $2.3-2.5 billion capex budget for 2019, essentially flat with the $2.4 billion it spent last year. Most of the capex is to be funneled to the core Eagle Ford, WhiteHorse properties in East Texas and the resurgent PRB, where the company has shifted into full development mode in the Turner formation, a tight sands oil play. Robust activity in all three plays is expected to drive oil production of 116,000-122,000 b/d, a 32% year/year increase.
Overall, Chesapeake is guiding for 475,000-505,000 boe/d this year, a rate of 13-20% annual growth adjusted for asset sales. Oil is expected to account for 26% of output by 4Q2019, compared with 21% at the same time last year.
Chesapeake has established subsidiary Brazos Valley Longhorn to operate the WhiteHorse assets and hold the properties’ credit facility and bonds. A combination of operational improvements and supply chain savings, including those for artificial lift, choke management, fracture spreads, transportation costs and drilling mud, have already shaved up to $350,000 of costs off each well in the play since the company closed the deal earlier this month. CFO Nick Dell’Osso Jr. said that while WhiteHorse historically relied on trucking to move volumes from the region, Chesapeake may build a gathering system to help cut costs.
The Brazos Valley unit plans to run four rigs on the new acreage this year and turn to sales up to 83 wells. The company has yet to drill and complete a well from start to finish on the acreage as the program gets into full swing. In the core Eagle Ford, Chesapeake will be most active with four drilling rigs and plans to place up to 125 wells online.
In the PRB, Chesapeake is shifting drilling activity to what management called a “more economic oil window” in the northern and western part of the play. As a result, the company expects to double its oil production there this year. Oil volumes increased by 78% last year to reach 11,000 b/d. The company is currently operating five rigs in the PRB and plans to turn 64 Turner wells to sales this year.
Chesapeake produced 464,000 boe/d in 4Q2018, a 7% year/year decrease adjusted for asset sales. For the full year, production increased by 4% from 2017, adjusted for asset sales, to 521,000 boe/d. Last year’s volumes consisted of 90,000 b/d of oil, 2.28 Bcf/d of gas and 52,000 b/d of natural gas liquids. Year/year oil production increased 10% in 2018.
The Marcellus Shale in Northeast Pennsylvania continues to account for the bulk of the gas volumes with current production of 2.4 Bcf/d. Chesapeake is running three rigs in the Marcellus, where it plans to place 48 wells to sales this year. While management has turned away from natural gas, executives said the Marcellus assets preserve a strong role in the liquified natural gas market. Chesapeake has a deal that begins by early 2021 to export Appalachian gas to the Carribean market.
The company also is currently running two drilling rigs in the Haynesville Shale in Louisiana, but plans to drop one rig in the second quarter. Twenty-four wells are planned to enter production in the Haynesville this year. Chesapeake also has one rig running in the Midcontinent in Oklahoma, where it plans to turn 25 wells to sales.
Under Lawler, the company has been focused on reducing debt, generating positive free cash flow and enhancing margins to right-size what was once a massive position across the Lower 48. The company finished 2018 with about $8.2 billion of principal debt outstanding, compared with $10 billion at the end of 2017.
Chesapeake reported fourth quarter net income of $514 million (49 cents/share), compared with $334 million (33 cents) in the year-ago period.
For the full-year, net income was $877 million (85 cents/share) from $953 million (90 cents) in 2017. Revenue increased to $10.2 billion in 2018, up from $9.5 billion in the prior year.
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