The economy has once again caused Chesapeake Energy to revise its financial and business plans for the coming years. The company announced it will again reduce capex spending, issue several volumetric production payment (VPP) transactions and cancel its previously announced distribution agency agreements in order to generate more cash flow.
“We believe our approach of selectively monetizing mature assets and undeveloped leasehold is an attractive supplement to the traditional E&P industry business model of simply drilling wells and collecting proceeds from production over future years and decades,” said Chesapeake CEO Aubrey McClendon.
In addition, the company is holding discussions with various parties to sell a minority interest in its midstream operations or a portion of its midstream assets.
In the wake of the continuing weakness of the U.S. economy, Chesapeake announced it will attempt to increase its cash reserves to $4 billion, from the $2.5-$3 billion the company previously announced last month.
The reserves will be increased by reducing capex spending for drilling by cutting 31%, or $2.9 billion, during the next two years. The company will also cut out 78%, or $2.2 billion, of its leasehold and producing property acquisition.
The company has reduced drilling, leasehold and producing property acquisitions for 2009 and 2010 by 58%, to $7.2 billion, since July 31.
“The company has ample financial liquidity and we will monitor market conditions and proactively manage our capital spending levels in order to remain within our cash resources,” said McClendon.
In accordance with the reduction in capex drilling, the company plans on cutting its operated rigs to 110-115 by Q1 2009, from the current level of 130. Since August, the company has lowered the number of operated rigs from 158.
Anticipated production growth is expected to be 5-10% in 2009 and 10-15% in 2010. The company previously announced anticipated production growth of 17% in 2009 and 16% in 2010.
While further sales of assets was not announced, the company did announce it will drawn an estimated $900 million by two separate VPP transactions.
The first sale will involve selling producing assets in the Anadarko and Arkoma basins for roughly $450 million. These assets feature 100 billion cubic feet of natural gas equivalent (cfe) in proved reserves and 55 million cfe/d in current net production. This agreement is expected to close by the end of 2008.
As Chesapeake previously discussed, it plans on selling a portion of its South Texas assets through a VPP rather than a straight asset sale. Company officials feel that a VPP represents greater value because they can get roughly the same amount, but retain rights to the assets.
The South Texas VPP transaction is expected to net $450 million through the sale of volumes produced from roughly 80 billion cfe of proved reserves and roughly 70 million cfe/d when it completes in early 2009.
“So far this year, we have received approximately $11.7 billion in cash and carried working interests through the sale of two VPPs, the creation of three joint ventures and the sale of our Arkoma Woodford shale assets,” said McClendon (GPR 11/12/08).
“In addition, we still retain 80% of our Haynesville assets, 75% of our Fayetteville assets and 67.5% of our Marcellus asset with indicated combined values of more than $25 billion,” he added.
McClendon stated that the company made a mistake with its planned distribution agency agreement to issue up to 50 million shares of stock.
“We underestimated how the market would assess the purpose, implication, timing and magnitude of our filings. Our intent was to create broad financial flexibility for an uncertain economic and commodity market environment over the next few quarters,” he said.
Thus far, Chesapeake has sold a 32.5% interest in its Marcellus holdings to StatoilHydro (GPR 11/12/08); a 32.5% interest in its Fayetteville holdings and a 100% interest in its Woodford shale holdings to BP (GPR 9/13/08); as well as a 20% interest in its Haynesville assets to Plains Exploration & Production (GPR 7/16/08).
Wall Street responded well to the company’s latest plan as the company’s stock rose 18%, or $2.76 per share, to $14.08 per share on the day.
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