Chesapeake Energy Corp. on Thursday cut its capital budget for the year by more than a fifth as chief executive officer Doug Lawler focuses on drilling in U.S. shale basins with the highest returns, but the company’s oil production outlook disappointed and the stock fell more than 7 per cent.
Analysts at energy-focused investment bank Simmons & Co in Houston said the company’s forecast for oil growth of 1 per cent to 5 per cent, a figure that does not adjust for 2013 asset sales, fell short of their expectations for growth of 12 per cent.
The Oklahoma City-based company said it would spend between $5.2-billion and $5.6-billion this year, about 20 per cent less than its 2013 capital expenditure estimate of $6.9-billion.
Lawler, who replaced Chesapeake’s co-founder and former CEO Aubrey McClendon in June, has pledged to cut costs and debt while increasing oil and gas production in the company’s most profitable fields. The company has undergone a restructuring under Lawler that included the elimination of 10 per cent of its workforce.
“We are going to be a low-cost producer, and we are going to be efficient in our investment,” Lawler told investors on a conference call.
He said the company is still very focused on growing its liquids output, but will not drill for oil in places where returns are not good. About 35 per cent of Chesapeake’s 2014 budget is earmarked for drilling in the Eagle Ford shale field.
Including capitalized interest, Chesapeake still faces a gap between operating cash flow and capital expenditures of $1-billion this year. Asset sales are planned, but the company declined to provide any additional details.
Chesapeake was targeting more than $4-billion from asset sales in 2013. On an absolute basis, Chesapeake is targeting 2014 production growth of 2 per cent to 4 per cent, it said on Thursday.
Adjusting for 2013 asset sales, the company said it expected overall production growth to rise 8 per cent to 10 per cent this year. Oil output is forecast to rise 8 per cent to 12 per cent, natural gas liquids production to increase 44 per cent to 49 per cent and natural gas output to climb 4 per cent to 6 per cent.
MORE RIGS IN THE HAYNESVILLE SHALE
A rise in natural gas and natural gas liquids output from Chesapeake’s operations in the central United States, the Utica shale in Ohio and Marcellus shale in the U.S. Northeast is also expected to contribute to production growth in 2014.
Chesapeake also said it has been adding rigs in the Haynesville Shale in Louisiana, a move that puzzled some analysts who contend that natural gas prices are not high enough to drill profitable dry gas wells.
Drilling for dry gas, which does not contain high amounts of liquids such as propane and butane that can be stripped out and sold at a premium, has slowed dramatically in formations like the Haynesville and Barnett Shale in Texas due to low prices.
Still, Chief Financial Officer Domenic Dell’Osso told investors that the company’s Haynesville wells were “highly economic.”
“We are pleased to be in a position to return some activity to the Haynesville in 2014,” he said.
As a result of cost-cutting initiatives, Chesapeake expects production expenses to fall by about 10 per cent to $4.25 to $4.75 per barrel of oil equivalent (boe) in 2014.
The company expects general and administrative expenses to slide 25 per cent this year.
After tumbling 7.4 per cent to a session low of $24.27, Chesapeake’s stock trimmed losses to trade down $1.71 at $24.50 in midday trading on the New York Stock Exchange.