Two transactions completed late in 2011 have helped Chesapeake Energy Corp. achieve “substantial progress” toward a goal of reducing debt by 25% by the end of this year, the company said Tuesday.
One year ago Chesapeake unveiled its “25/25 Plan,” a strategy to cut long-term debt by 25% while achieving a production growth of about 25% over two years (see Daily GPI, Jan. 7, 2011). The strategy was refined to a “30/25 Plan” in July, under which the company said debt would fall by 25% and production would rise by 30%, net of property sales, by the end of 2012.
The two-year debt strategy remains intact, but Chesapeake said low natural gas prices could alter year-end 2012 output.
“During 2011 Chesapeake increased its annual production by 15% to an average of approximately 3.27 Bcfe/d. However, if natural gas prices remain at currently depressed levels, Chesapeake will further reduce its drilling capital expenditures on dry natural gas plays, which would likely decrease its projected natural gas production and could reduce its two-year production growth target below 30%.”
Chesapeake, which has been criticized by energy analysts for its proliferate spending, said its long-term debt, net of cash, was about $10.3 billion at the end of December, which was $1.4 billion less than at the end of September and $2.2 billion lower than at year-end 2010.
Nearly all of the reduction in debt from September through December resulted from two transactions completed at the end of the year. Last Friday Chesapeake completed a joint venture transaction in the Utica Shale with the U.S. subsidiary of France’s Total SA, a company that had been all but acknowledged to be the Oklahoma City-based producer’s silent partner for almost two months (see Daily GPI, Jan. 4). Total paid Chesapeake close to $610 million in cash at closing; another $1.42 billion is to be paid in the form of a drilling and completion cost carry, which is expected to be fully received by the end of 2014.
Also last week Chesapeake agreed to sell its natural gas pipeline gathering system in the Marcellus Shale to affiliate Chesapeake Midstream Partners LP for $865 million (see Daily GPI, Jan. 3). In that deal Chesapeake received $600 million in cash and $265 million in equity.
The 30/25 Plan “calls for the company’s long-term debt (net of cash) to be approximately $9.5 billion as of year-end 2012 and the company fully intends to achieve this level by year-end 2012, regardless of the price of natural gas during the year,” it said. Last year more than 70% of the two-year debt reduction goal was achieved, Chesapeake noted. Long-term net debt per unit of proved reserves also was cut by 25% to 55 cents/Mcfe from 73 cents.
Even though it sold about 2.8 Tcfe of proved reserves, preliminary estimated year-end 2011 proved reserves totaled almost 18.8 Tcfe, which is 10% above year-end 2010 levels, the company noted.
In addition, Chesapeake disclosed that it has downside protection in place on about 44% of its projected liquids production for the first half of 2012 at an average price of $101.72/bbl and about 25% of its projected liquids production for the second half of 2012 at an average price of $102.59/bbl.
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