The FINANCIAL — Chesapeake Energy Corporation on August 2 reported financial and operational results for the 2017 second quarter plus other recent developments.
Highlights include:
Average 2017 second quarter production of 527,600 boe per day, flat sequentially
Average 2017 second quarter oil production of 88,400 barrels per day, up 6% sequentially
Total production averaged approximately 548,300 boe per day, including a peak rate of 90,400 barrels of oil, in July; goal of reaching 100,000 barrels of oil per day by year-end on track
Actively managing capital expenditures program for remainder of 2017, dropping to 14 rigs by year-end 2017 from 18 rigs today
Approximately $360 million of expected asset sales closed or under signed purchase and sale agreements year to date
Marcellus Shale well achieves record rate of more than 61,000 mcf per day
Doug Lawler, Chesapeake’s Chief Executive Officer, commented, “Our assets continue to deliver improving well results due to longer laterals and enhanced completion techniques, with a new record operated well in the Marcellus being a prime example of this. We expect our total production to move higher throughout the year, driven by large turn-in-line projects underway in the Eagle Ford, Utica and Powder River Basin operating areas. This has already started, as we averaged approximately 548,300 barrels of oil equivalent per day, including a peak rate of 90,400 barrels of oil production, for the month of July.
“Despite our anticipated growth, we are actively managing our 2017 capital program to the highest-return investments in our portfolio or reducing spending in certain areas altogether. Our planned activity levels result in a reduction of our rig count and wells placed on production during the last six months of the year, as our 2017 capital program has been focused on restoring our cash flow generating capability, improving our margins and growing value. Improving our balance sheet is our number one priority at Chesapeake, and we will remain flexible in our capital spending program, both for the remainder of 2017 and in 2018, as we continue to drive toward cash flow neutrality.”
2017 Second Quarter Results
For the 2017 second quarter, Chesapeake’s revenues increased by 41% year over year primarily due to an increase in the average realized commodity prices for the company’s production and unrealized hedging gains, partially offset by a decrease in production volumes sold. Chesapeake’s revenues decreased 17% quarter over quarter due to a decrease in the average realized commodity prices for the company’s production, primarily the seasonal decrease in natural gas prices and lower unrealized hedging gains. Average daily production for the 2017 second quarter of approximately 527,600 barrels of oil equivalent (boe) increased by 2% sequentially, adjusted for asset sales, and consisted of approximately 88,400 barrels (bbls) of oil, 2.294 billion cubic feet (bcf) of natural gas and 56,900 bbls of natural gas liquids (NGL).
Average production expenses during the 2017 second quarter were $2.92 per boe, while G&A expenses (including stock-based compensation) during the 2017 second quarter were $1.45 per boe. Combined production and G&A expenses (including stock-based compensation) during the 2017 second quarter were $4.37 per boe, an increase of 7% year over year and an increase of 4% quarter over quarter driven by a decrease in producing well count due to divestitures resulting in reduced cost recovery in G&A. Gathering, processing and transportation expenses during the 2017 second quarter were $7.44 per boe, a decrease of 7% year over year and a nominal decrease quarter over quarter, according to Chesapeake Energy Corporation.
Chesapeake reported net income available to common stockholders of $470 million, or $0.47 per diluted share, while the company’s EBITDA for the 2017 second quarter was $812 million. Adjusting for unrealized gains on commodity derivatives, impairments related to the reduction of transportation commitments on the Gulf Crossing pipeline, the gain on repurchase of debt and other items that are typically excluded by securities analysts, the 2017 second quarter adjusted net income attributable to Chesapeake was $146 million, or $0.18 per diluted share, while the company’s adjusted EBITDA was $461 million. Reconciliations of financial measures calculated in accordance with GAAP to non-GAAP measures are provided on pages 12 – 18 of this release.
Capital Spending Overview
Chesapeake’s total capital investments were approximately $667 million during the 2017 second quarter, compared to approximately $576 million in the 2017 first quarter and $456 million in the 2016 second quarter.
Balance Sheet and Liquidity
As of June 30, 2017, Chesapeake’s principal debt balance was approximately $9.7 billion with $13 million in cash on hand, compared to $10.0 billion with $882 million in cash on hand as of December 31, 2016. The company’s total liquidity as of June 30, 2017 was approximately $3.1 billion, which included cash on hand and a borrowing capacity of approximately $3.1 billion under the company’s senior secured revolving credit facility. At June 30, 2017, the company had $575 million of outstanding borrowings under the revolving credit facility and had used $100 million of the revolving credit facility for various letters of credit. The company’s borrowing base under the senior secured revolving credit facility was reaffirmed by the lenders at $3.785 billion on June 15, 2017.
Asset Divestitures Update
Year to date, Chesapeake has sold or agreed to sell multiple producing properties for approximately $360 million to various private buyers, excluding the proceeds from the company’s Haynesville Shale divestitures announced in December 2016 that closed in 2017. As of June 30, 2017, Chesapeake has closed $95 million in asset sales with approximately $265 million pending and expected to close by the end of the 2017 third quarter, subject to certain customary post-closing adjustments.
Operations Update
Chesapeake’s average daily production for the 2017 second quarter was approximately 527,600 boe and is further detailed in the table below. Chesapeake’s projected production volumes and capital expenditure program are subject to capital allocation decisions throughout the year and may be adjusted based on prevailing market conditions.
Chesapeake is currently utilizing 18 drilling rigs (below the 2017 second quarter average of 19) across its operating areas, seven of which are located in the Eagle Ford Shale, four in the Mid-Continent area, three in the Haynesville Shale, two in the Powder River Basin (PRB) and two in Northeast Appalachia. Chesapeake plans to exit 2017 utilizing 14 rigs and intends to place on production approximately 20 fewer gross operated wells in 2017.
In the Eagle Ford Shale, Chesapeake placed its first Upper Eagle Ford Shale well, the Blakeway 3D DIM 2H, on production in June 2017 at a peak rate of 1,759 boe per day (86% oil). Chesapeake expects to place on production up to 100 wells in South Texas in the second half of 2017, compared to 61 wells in the first half of 2017.
In the PRB, Chesapeake’s first well targeting the Mowry formation, the Combs 17-33-70 USA B MW 40H, was drilled with a 4,200-foot lateral and placed on production in July 2017. This well was drilled in the gas window to test productivity, permeability and pressure and near current pipe infrastructure to minimize cycle time. This well has reached a peak rate of 6,629 thousand cubic feet (mcf) of natural gas per day and is expected to climb as it unloads fracture stimulation fluid. Chesapeake’s next Mowry tests are planned to be drilled in 2018 in the wet gas window with longer laterals.
The company’s second Turner well, the Rankin 5-33-68 A TR 1H, was placed on production in May 2017 and reached a peak rate of 2,886 boe per day (51% oil). Chesapeake plans to place on production up to four additional wells in the Turner formation by year-end 2017. The company also expects to place up to 14 new wells targeting the Sussex formation by year-end 2017. Currently, Chesapeake plans to add a third rig in the PRB operating area in October 2017 and expects to place on production up to 19 wells in the second half of 2017, compared to nine wells in the first half of 2017.
In the Marcellus Shale, the company placed the McGavin E WYO 6H well on production with a 10,429-foot lateral and enhanced completion. This well has reached a peak rate of 61,759 mcf of gas per day after six days of production, making it the highest-rate operated well in the Marcellus Shale in the company’s history. Chesapeake has approximately 2.2 bcf of gas per day of gross productive capacity and expects to maintain its gross production at or around its total capacity through the remainder of 2017, depending on gas prices. Chesapeake expects to place on production up to 40 wells in the Marcellus Shale in the second half of 2017, compared to 11 wells in the first half of 2017.
In the Haynesville Shale, the Hunter 20&17-12-12 1H ALT well located in DeSoto Parish was placed on production in July 2017 with a 7,495-foot lateral. This well reached a peak rate of 38,840 mcf of gas per day, resulting in one of the highest rates per lateral foot in the company’s history from the area. Chesapeake expects to place on production up to 23 wells in the Haynesville Shale in the second half of 2017, compared to 17 wells in the first half of 2017.
Chesapeake re-completed its first Haynesville well utilizing a new production liner in July 2017. After installing the new liner, Chesapeake re-stimulated the well and returned it to production at a peak rate of approximately 9,043 mcf of gas per day, compared to producing 65 mcf of gas per day before the re-stimulation treatment. This recompletion was performed on one of the first wells Chesapeake drilled in the Haynesville. Drilled in 2008, the well had an initial peak production of 4,705 mcf of gas per day producing from a 2,990-foot lateral in 2008.
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