Thursday, February 6, 2014

Outlook: Chesapeake

Chesapeake Energy held a conference call this morning to present its 2014 outlook.  The company continues its existing themes of focusing on liquids and reducing capital expenditures (~$5.4 billion in 2013, down from $6.9 billion in 2012 and $13.4 billion in 2011).  The good news is that the company is not completely ignoring dry gas and the Haynesville Shale.  It will deploy between seven and nine rigs to the Haynesville in 2014 (they are currently running seven) and spend around $540 million, ~10% of the capex budget, in the region.

While the investor focus continues to be liquids, gas is less of a step-child this year.  So far, Chesapeake has hedged 68% of its estimated 2014 production at an average price of $4.15/MMBtu through swaps and collars, so it can drill gas more comfortably than in the past couple of years.  (Hopefully the hedging machine has been working overtime in the past couple of weeks with the favorable gas prices).

The company is targeting well costs in the $7.9 to $8.3 million range this year, largely because all of its new Haynesville wells will be drilled in groups on various pads.  Given that CHK's wells cost an average of $9.4 million in 2013, the 2014 estimate might be a bit rosy, but if it does work out, returns are pretty sweet at current prices.

Bottom line:  Chesapeake will be one of the bigger 2014 drillers in the Haynesville Shale, but instead of the "hunt and peck" method of its past, it will be drilling in concentrated clumps.  The big question in my mind is whether or not the company will divest itself of some of its outlier properties to raise cash and heighten focus on its core areas.  We've certainly heard that former CEO Aubrey McClendon has some dry powder looking for some Haynesville acreage to drill.  I would not be surprised to see a couple of smaller transactions.

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