Chesapeake Energy Corp.’s shares fell more than 5% in midday trading Friday as investors expressed their dismay at the company’s third quarter earnings report, which indicated rising debt levels and continued heavy spending in the U.S. onshore.

The company delivered a $3.4 billion joint venture in the Utica Shale late Thursday — its seventh JV in a U.S. shale play in the past three years (see Daily GPI, Nov. 4). However, in the latest quarter Chesapeake increased its debt by $1.7 billion and capital spending for new acreage totaled more than $1.2 billion.

The Oklahoma City-based independent around midday Friday was trading down $1.67/share at $27.36 in heavy volume.

During a conference call Friday to discuss Chesapeake’s quarterly performance, CEO Aubrey McClendon was peppered with questions from energy analysts about the rising debt levels and continued high spending levels.

“I think the emphasis is misplaced on what we’re spending, not what we’re finding,” he said.

The debt levels are expected to decline in 4Q2011 as the company applies an expected $2.3 billion in cash from various transactions to its revolving line of credit.

“We will come up with the cash we need to run our business,” said McClendon.

In 3Q2011 Chesapeake’s net income rose to $879 million ($1.23/share), operating cash flow was $1.41 billion and earnings before interest, taxes, depreciation and amortization was $2.01 billion. Revenue totaled nearly $4 billion.

Production levels continue to move more to liquids and oil, McClendon noted, but the company still is heavily weighted to natural gas.

Total natural gas, natural gas liquids (NGL) and oil production in the latest quarter was 306 Bcfe. Average daily output was 3.33 Bcfe/d, up 9% year/year (y/y) and 9% sequentially. Liquids output jumped 91% from a year ago and 21% sequentially.

Natural gas production, which rose 1% y/y, was 83% of total output at 254 Bcf. A year ago gas was 90% of Chesapeake’s output. Oil and NGL production climbed to 8,669 bbl in the latest period from 4,533 bbl and was up sequentially from 7,192 bbl. Average prices realized in 3Q2011 were $4.82/Mcf and $63.03/bbl, for a realized natural gas equivalent price of $5.78/Mcfe.

McClendon told analysts that in the past 11 years the company had “built the largest combined inventories of onshore leasehold,” which now totals an estimated 15 million net acres, along with 30-plus million acres of 3-D seismic.

“The company has also accumulated the largest inventory of U.S. natural gas shale play leasehold,” estimated at 2.5 million net acres, “and now owns the leading position in 12 of what Chesapeake believes are the top 15 unconventional liquids-rich plays in the U.S. — the Granite Wash, Cleveland, Tonkawa and Mississippi Lime plays in the Anadarko Basin; the Avalon, Bone Spring, Wolfcamp and Wolfberry plays in the Permian Basin; the Eagle Ford Shale in South Texas; the Niobrara Shale in the Powder River and Denver-Julesburg basins; the Bakken/Three Forks in the Williston Basin; and the Utica Shale in the Appalachian Basin.”

The company currently is using 171 operated drilling rigs to develop its inventory of 38,700 net risked drill sites. Of the operated rigs, 105 are drilling wells primarily focused on unconventional liquids-rich plays, 63 are drilling wells focused on unconventional natural gas plays and three are drilling conventional natural gas plays.

The company reduced its gas-directed activity by 18 rigs from July and by 31 rigs from January. In addition, 165 of Chesapeake’s 171 operated rigs are drilling horizontal wells.

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