Chesapeake Deleveraging, Increasing Natural Gas Liquids Volumes To Ride Out Slump In Natural Gas Prices

Chesapeake Energy (NYSE:CHK) reported a strong set of Q1 2014 numbers on the back of higher production volumes. Chesapeake’s overall quarterly production grew by 2% year-over-year to around 60.8 million barrels of oil equivalent (boe). Adjusting for recent asset sales, production rose by an encouraging 11%. Oil production improved by around 6%, although natural gas production saw a slight decline. However, natural gas liquids(NGL) remained the key growth driver for the quarter, with production rising by about 55% year-over year to 7.6 million barrels. This growth came from strong production in the Utica and Southern Marcellus regions. Chesapeake’s output from the Utica shale increased by around 422% year-over-year, and natural gas liquids production has accounted for roughly 30% of its Utica volumes. Infrastructure has for long proved a bottleneck in the Utica shale, and the commencement of shipments on pipelines such as the ATEX  pipeline (which provides connectivity to the Gulf) during the quarter has provided much-needed takeaway capacity from the shale. Chesapeake also raised its 2014 total production growth outlook to 9-12%, up from a previous estimate of 8-10%, on the back of better natural gas liquids volumes. ^[1]

See our complete analysis for Chesapeake Energy here

Our price estimate for Chesapeake Energy is ~$28, in line with the current market price.

Higher Ethane Recovery To Help NGL Production

Chesapeake is developing the Utica and Marcellus shales to meet the long-term target of 1 million barrels of oil equivalent production per day. To this end, it has plans to make $5 billion worth of investments, which will help the company drill more than 250 wells in the next two years. As natural gas prices remain low, the move to increase the share of NGL in the total production mix is a sound strategy. The company has stated that NGL production will be contributing about 13% to the total production.

The company’s NGL production could also be helped by higher ethane recovery from its natural gas production. Low ethane prices made natural gas companies recover less ethane from the gas they shipped onto pipelines, resulting in a richer and higher value (since ethane has a higher energy content) gas. However, this year, Chesapeake has indicated that it would be recovering a greater percentage of ethane from its gas stream, which could lead to lower gas prices while boosting natural gas liquids production. NGLs contain a mix of hydrocarbons such as ethane, propane, butane, isobutene and pentane, which have different applications and fetch different prices in the market. Ethane is typically the largest component of NGLs (roughly 40%, could vary by producer) followed by propane.

Reduced Debt Burden

CHK has decided to spin-off the Chesapeake Oilfield Operating Company into Seventy Seven Energy, which will help the company to unload $1.1 billion worth of debt off its balance sheet. ^[2] Additionally, the sale of shares of Chesapeake Cleveland Tonkawa to preferred shareholders will also remove about $1 billion in equity belonging to third-parties from the balance sheet. It will also allow the company to remove $160 million of liabilities from the balance sheet. ^[3] With these deals, Chesapeake expects to reduce its debt burden by $3 billion.

The sale of Oklahoma and Texas based non-core assets will also bring in over $300 million in cash. The company also locked-in more cash inflow by selling its non-core assets with minimum production in Southwest and Powder River Basin. ^[3] The sale of acreage in these regions will help the company bring in about $290 million in cash. These asset sales will reduce the company’s debt burden by a significant amount while only affecting production by 2%. These measures will result in a reduced debt burden, lower maintenance costs(because fewer assets) and increased market value of its remaining assets. The company has generated about $925 million in cash through asset sales so far. The aim is to generate about $4 billion by the end of the year.

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1. Chesapeake Energy Q1 2014 Earnings Conference Call, Seeking Alpha, May 2014 [↩]
2. Chesapeake Energy to spin off oilfield services division, Reuters, May 2014 [↩]
3. Chesapeake Says Asset Sales In Excess Of $4 Bln In 2014, Sets 2015 Outlook, RTT News, May 2014 [↩] [↩]