Chesapeake Energy’s quarterly earnings call once again found company Chairman and CEO Aubrey McClendon defending the company’s decisions to sell interest in portions of their acreage.
“I think it’s pretty extraordinary that nobody really focuses on what these carries have done to our funding cost,” he said during the call when highlighting the company’s decision to sell interest and create drilling carries.
“Since Jan. 1, 2008, we have monetized approximately US$12.5 billion of assets that had a cost basis to us of $2.2 billion…Despite having delivered these results during some pretty challenging economic conditions, some observers of our company apparently do not believe we have the capability of monetizing other assets in the future. We beg to differ,” he said.
McClendon also stated that there was more than one way to make a profit in production than merely drilling and producing wells. He stated that the company’s decision to sell portions of its asset base in order to generate more capital and create drilling carries was a side business that was working quite well for the company.
“This is an important value-creating complimentary business line…[that] highlights our singular ability to identify and develop new plays and end up owning a top three leasehold position in them and then creatively maximize value and minimize risk by selling a minority position to an industry partner,” he said. “I am happy to report that most of our competitors either do not have the capability or the desire to compete with us in this segment of our business strategy.”
He noted by selling off portions of its holdings in various plays that the company has been able to generate over $10 billion in capital this year, which it would not have generated by drilling and producing wells. McClendon added that this sort of business model is used in just about every other industry, aside from the energy sector and that is why it is being viewed suspiciously.
McClendon added that this approach ensured that the company got substantial proceeds up front rather than waiting years for the production to return their investment and enabled the company to reinvest in regions they felt were stronger, as well as new regions such as the Eagle Ford.
“There is no shortage of companies, especially big international companies that are looking for an entry into some of these plays and we have demonstrated that we know how to work a deal with them,” he said.
This different approach from their competitors can also be found in the company’s decision to not hedge natural gas on a widespread basis for 2010. Despite the company performing strongly, McClendon said Chesapeake continued to be questioned for not hedging strongly.
“Some are wondering why we haven’t rushed out and hedged a lot of $5.50 or $6 gas for 2010 like so many of our colleagues have done in the past few weeks and months. The reason is that in our view it’s simply not time yet. The art and science of hedging requires careful analysis and abundant patience, both of which we believe we possess in good measure,” he said.
McClendon said that the company had the capability to hedge nearly four years of its future natural gas production. He said the company would begin to hedge production once prices represented strong investor value and he again questioned the rush to hedge by other companies, which he said limited shareholder value creation.
“Some companies wouldn’t hedge $8 gas in 2010 a year or two ago. It’s a little curious that they are eager to hedge $5.50 or $6 gas lately…We think that gas production will be down significantly in the months and quarters ahead and we think that will present use with ample [hedging] opportunities. We think there’s more to hedging than just simply executing the hedge. We think you need to do it at the right time and we haven’t felt like the right time has arrived yet,” McClendon said.
For the third quarter, Chesapeake achieved a new quarterly record for production at an average daily rate of 2.483 billion cubic feet equivalent (Bcfe). Since the start of the fourth quarter, this daily rate has increased to 2.6 Bcfe and McClendon said the company expects the daily net production to exceed 2.8 Bcfe in 2010 and top 3 Bcfe in 2011.
This growth was pushed by the “Big Four” shales: the Barnett, Haynesville, Fayetteville and Marcellus, along with the Granite Wash, McClendon said. These plays are expected to drive the company’s production increases over the next 20-40 quarters, he added. Chesapeake continues to envision the Bossier shale as having strong growth potential, but since it resides over the Haynesville, the company hasn’t been as active in production at this time as the company has been able to drill through the Bossier and hold those leases while producing in the Haynesville.
“Right now, only one out of our 35 rigs is working on the Bossier, but that could increase in the weeks and months ahead. It looks like a big time play. I think some day we’ll probably start talking about the big five shale plays with the Bossier being fifth and with 175,000 acres we think we’re probably in a position where we have more acreage in that core than anybody else,” he said.
--Frank Nieto, Gas Processors Report
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