UPDATE: Chesapeake Energy To Cut Spending, Debt; Boost Output
07 January 2011 - 6:22AM
Dow Jones News
Chesapeake Energy Corp. (CHK) Thursday said it plans to curtail
spending and sell assets to cut long-term debt by 25% over the next
two years, while boosting oil and natural-gas output at the same
time.
The Oklahoma City-based company has for years shelled out large
amounts of money to snap up oil- and gas-rich properties, spending
about $5 billion on land last year alone. This heavy outlay has
sometimes rankled investors but it helped make Chesapeake a leader
in the recent ramp-up in gas and oil production from deeply buried
shale-rock formations. Ballooning shale-gas output substantially
boosted U.S. reserves of the fuel and pressured prices lower.
The company's shift in strategy comes after billionaire activist
investor Carl Icahn last month disclosed a 5.8% stake in
Chesapeake. In a regulatory filing, Icahn said he believes the
stock is undervalued and that he has begun talks with management
about the business and how to maximize shareholder value. Icahn
will have an opportunity to nominate four of the company's nine
directors this May when shareholders hold their annual meeting.
The plan announced Thursday "represents a fundamental shift from
our aggressive asset accumulation of the past few years to a
multiyear period of asset harvest, characterized by a clear focus
on capital discipline and maximizing returns," Chief Executive
Aubrey McClendon said in a prepared statement.
In addition to reining in spending, Chesapeake plans the sale of
a stake of more than 1 million acres in a shale play, and expects
to soon announce the creation of a joint venture to develop acreage
in Nebraska's Niobrara shale formation, the company's investor
relations and research manager John Kilgallon said late Wednesday.
During a webcast presentation, Kilgallon added that the company
will also likely sell assets to its subsidiary Chesapeake Midstream
Partners LP (CHKM), in deals similar to last month's $500 million
sale of Louisiana pipelines to the unit.
Analysts with UBS Investment Research wrote in a note to clients
that shareholders for years have urged Chesapeake to "tap the
brakes on its aggressive" spending, adding it appears Icahn's
investment has been the catalyst for the company's new
strategy.
While the company cuts spending, it said it also expects to
boost output by 25% over the next two years. This is down from
earlier forecasts for 35% to 40% production growth. The output rise
comes as Chesapeake puts more emphasis on oil production, aiming to
become a top U.S. producer of the commodity while maintaining its
position as the No. 2 U.S. gas producer after Exxon Mobil Corp.
(XOM). With gas prices down substantially thanks to surging shale
development, Chesapeake and other gas producers are aiming to boost
production of more lucrative oil.
On Thursday Chesapeake didn't specify how the additional output
would break down between oil and gas, but McClendon said the shift
to liquids would still occur.
The company also said Thursday that its average daily production
in the fourth quarter jumped 11% from a year earlier and that it
has hedged about 96% of its expected gas output in 2011,
anticipating low prices.
Chesapeake's shares were recently up 20 cents at $26.70.
Simmons & Co. analyst Jeff Dietert said Chesapeake's "plan
to go into a harvest mode and reduce debt is what investors want to
hear, but most will likely wait to see Chesapeake begin to execute
this plan until giving them credit in their stock price."
-By Ryan Dezember, Dow Jones Newswires; 713-547-9208;
ryan.dezember@dowjones.com
(Matt Jarzemsky in New York contributed to this article.)
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