Chesapeake Energy Corp. continues to look for a new CEO but it has no timetable on when one might be in place, acting chief Steven C. Dixon said last week. Dixon, who served as a lieutenant to former CEO Aubrey McClendon for 22 years and has been COO, will run the company as the search for a permanent chief continues.
McClendon officially stepped aside last Monday following more than a year of unsavory financial disclosures that led top shareholders Southeastern Asset Management Inc. and Carl Icahn to revamp the board and take away some of his bonuses and power. Heidrick & Struggles are assisting with Chesapeake in its search for a CEO.
Dixon has served as executive vice president (EVP) and COO since 2006 and has held various senior operational positions since joining Chesapeake in 1991.
During a conference call to update analysts about the company, Dixon credited McClendon for guiding the company to its preeminent position in the U.S. onshore and thanked him for the “wisdom, guidance and friendship” he had shared over the past 22 years.
There’s no permanent replacement and no timetable on when a successor will be named, he said. However, operations are running “smoothly,” despite some constraints in the Utica Shale.
“There are no speculations,” Dixon told analysts during a conference call when asked if he might be a top candidate or when a permanent CEO would be named. “We won’t address that.”
Dixon for now is to work in tandem with nonexecutive Chairman Archie Dunham and CFO Nick Dell’Osso in a newly created Office of the Chairman. Dell’Osso has served as EVP and CFO since 2010 after serving in various financial roles since 2008. Dunham, former ConocoPhillips chairman, joined Chesapeake last June after McClendon was stripped of that title (see NGI, June 25, 2012).
“Our senior management team is energized about the opportunities ahead,” Dixon told analysts. The company, he said, would continue to be “focused” on liquids opportunities and to “enhancing our financial flexibility to fund future growth.”
With natural gas prices rising, Chesapeake has begun hedging some of its production “at above $4.00, a level that the market has not seen in quite some time,” said Dixon. “There’s certainly sentiment in the market that gas has bottomed and is on the way up,” Dixon said.
Asked if Chesapeake, the second largest gas producer in the United States, might reconfigure its liquids-focused drilling plans and go after more dry gas targets, the CEO was clear.
“We’re on a pretty strict budget, and we’re not planning on changing our activity on dry gas drilling. There are no changes.”
The company’s current level of drilling, is “on pace and below budget.” Capital expenditures are expected to come in below 1Q2013 guidance. Liquids production is averaging 160,000 b/d, a “high water mark” for the company. In total, Chesapeake has 81 rigs now running across all of its plays, which is the level planned for 2013.
In the Utica Shale, where Chesapeake has about one million acres, the operator has drilled more than 240 wells — “75% of the wells drilled in the play thus far,” Dixon explained. The only problems are related to infrastructure constraints. “We’ve turned to sales only 54 wells, but we have substantial completions planned this year.”
It’s not a lack of gathering lines or compression, but there just isn’t enough gas processing capacity available, said Dixon. More capacity is expected to be ramped up by midyear, which, if it occurs, would allow Chesapeake to produce a projected 55,000 boe/d by the end of the year.
“The timely startup of critical infrastructure is key,” he said.
The Eagle Ford is showing “strong operational results, with a daily record high of 124,000 b/d of gross oil, or 56,000 b/d net,” Dixon told analysts.
Chesapeake’s total daily net is averaging 80,000 boe/d, and it’s targeting daily output of 92,000 bbl by the end of the year, even with planned asset sales.
“The margins continue to be strong,” with light Louisiana sweet crude oil pricing “well above” West Texas Intermediate prices. “Further margin expansions are expected with the startup of multiple pipelines.”
Chesapeake has sold about $1.5 billion in assets this year, but it still has assets worth about $4-7 billion on the market, said the CEO. It may not come through headline-grabbing sales, but through a lot of much smaller ones, he explained.
“We are pleased with multiple sales of small asset packages,” Dixon noted. “They may not be individually noteworthy, but in aggregate, combined they are very meaningful in improving the balance sheet…We are on track for additional sales in the next few months.”
The latest sale is a package of proven reserves in the prospective Hunton Limestone formation in Oklahoma to Gastar Exploration Ltd., which is paying $85 million (see related story). Gastar also is buying 9.9% of its common stock that Chesapeake had held for an estimated $9.8 million. In addition, Chesapeake and Gastar agreed to settle all current litigation between them, conditioned upon the stock purchase closing.
In reaction, Wells Fargo’s David Tameron said the news was a “net-net slight positive,” but he didn’t think it did much near term to change the perception of Chesapeake’s (CHK) share price.
“We believe the call was mostly likely an effort to assure the market that CHK has and is actively addressing the leadership vacuum created by Aubrey’s departure (with no clear successor in place) and also to assure investors that things are moving forward smoothly on the operational front,” he wrote. “Management did point out that through the first quarter, capital spending has been tracking below budget, which is a positive indicator of not only financial discipline, but also likely some of the fruits of the company’s focus on enhancing efficiency and driving down costs.
“At the same time production is on track to meet guidance and noted that liquids production topped 160,000 boe/d recently and total production regained the 4 Bcfe/d mark. Management noted weather (mostly late March snow) and midstream issues in the Midcontinent that affected production,” which “could be a negative read through for other Midcon focused operators” (see related story).
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