23
Sep

CHK Takes The Pedal Off The Metal

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Chesapeake Responds To Low Natural Gas Prices

Capital Budget Coming Down... Between now and year end 2010, CHK see's cutting its previously announced capital budget by $3 billion. This is simply a response to lower gas prices. In Septembers past, CHK has curtailed uneconomic production and they are doing that as well but rarely have they taken this kind of budget cutting action and my sense is that it is the right step right now as further efforts to grow production are not being rewarded by the Street.

...Which Will Yield Excess Cash Flow. Chesapeake for years has routinely outspent cash flow as it grew its portfolio of potential reserves and drillling locations while rapidly developing its plays. They now see $2 billion in excess cash flow generation for the 2009 - 2010 period which will be largely funneled to debt reduction. I'd note also that CHK's assumptions are based on its current largely hedged position and an assumption of $8 gas in 2009/10 with some operating cost creep built into their budget despite the lack of top line inflation.

Production Guidance Coming Down:

  • 2008 goes from 21 to 18% YoY growth
  • 2009 and 2010 go from 19% to16%

Operations Update:

Rig Count Coming Down. As you would expect, spend less money, use less rigs.

  • Rig count of 157 company wide expected to fall to 140 by YE08 and to remain there through 2010. That's a pretty big change from the usual "add rigs each and every quarter until the end of time" juggernaut that Chesapeake has become known (notorious?) for. 
  • For (CHK) that does not mean they will be drilling the same number of wells each year as they continue to optimize wells in their high impact plays. In this way, look for them to beat those new production numbers.

Haynesville Shale: 3 more completions "in excess" of 10 MMcfepd.

  • No well names so we can't track what part of the play they were in.
  • We know they were not  JV wells with (PXP) as that was mentioned as an October event
  • Note the (e) on the production...need to get a better feel for the liquids content here although we know it to be drier than the Barnett.
  • At 10 MMcfepd, these are monster wells in any other shale...for the Haynesville they are more run of the mill. My questions would be:
    • "are they run of the mill and is this what we can expect and not the high teens we've seen out of names like (HK) and rumored rates in the 20+ MMcfgpd range" and
    • "what does it say about deliverability out of this gas price killing play of all plays?" Hmmmm.

Midcontinent Volume Curtailment. For weeks we have been talking about the wide differentials producers are seeing relative to Henry Hub gas prices and the potential for sub-economic returns this creates. CHK is curtailing 100 MMcfgpd of net production (4% of total company produciton) that is unhedged and below break even now. Expect others to follow suit asprice takes care of price.

Other CHK  Odds & Ends:

  • The Midstream Business Minority Stake Sale Concept Is Back on the Table: Price tag: $1 billion. This sale is included in the $2 billion free cash flow number mentioned above.
  • Marcellus Shale Sale: CHK continues to plan to sell a 25% stake in this nacent play by year end.
  • Conference call: today, 9 EST

2 Responses to “CHK Takes The Pedal Off The Metal”

  1. 1
    BirdsofpreyRcool Says:

    where are all the comments?

  2. 2
    Zman’s Energy Brain ~ oil, gas, stocks, etc… » Blog Archive » Wrap Week Ended 09/26/08 (In Progress) Says:

    […] CHK Takes The Pedal Off The Metal […]

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