Chesapeake Changes Mix to More Liquids, Less Gas

Chesapeake Energy has accelerated its efforts towards a more liquids-rich asset base in recognition of the "significant and persistent" value gap that has developed between natural gas and oil prices, the company reported in an operational update released August 2.
The company has redirected a significant portion of its technological, geoscientific, leasehold acquisition and drilling expertise to identifying, securing and commercializing unconventional liquids-rich plays.

Chesapeake also is reducing its projected 2011 drilling and completion capital expenditures on natural gas plays by approximately $400 million and increasing its drilling and completion capital expenditures on liquids-rich plays by approximately $400 million.

On a net basis, after joint venture carries, Chesapeake is projecting 2011 drilling and completion capital expenditures will remain flat compared to 2010 drilling and completion capital expenditures of approximately $4.5 billion - $4.6 billion. Chesapeake will increase its operated net drilling and completion capital expenditures on liquid plays from 13 percent in 2008 to approximately 55 percent in 2012.

To date, Chesapeake has built leasehold positions and established production in 12 disclosed and several undisclosed liquids-rich plays. The company now owns approximately 2.4 million net acres of leasehold in liquids-rich plays with approximately 3.0 billion BOE (18 Tcfe) of risked unproved resources and approximately 8.2 billion BOE (49 Tcfe) of unrisked unproved resources.

During the first half of 2010, Chesapeake drilled 687 gross operated wells (440 net wells with an average working interest of 64%) and participating in another 562 gross wells operated by other companies (73 net wells with an average working interest of 13%). The company's drilling success rate was 99% for both company-operated wells and non-operated wells.

Since 2000, Chesapeake has built the largest combined inventories of onshore leasehold (13.9 million net acres) and 3-D seismic (25.5 million acres) in the U.S. and the largest inventory of U.S. natural gas shale play leasehold (2.8 million net acres) and now owns the largest inventory of leasehold in two of the Top 3 new unconventional liquids-rich plays – the Eagle Ford Shale and the Niobrara Shale.

On its total leasehold inventory, Chesapeake has identified an estimated 16.1 Tcfe of proved reserves (using volume estimates based on the 10-year average NYMEX strip prices at June 30, 2010), 95 Tcfe of risked unproved resources and 225 Tcfe of unrisked unproved resources. The company is currently using 133 operated drilling rigs to further develop its inventory of approximately 40,000 net drillsites.

Of Chesapeake's 133 operated rigs, 91 are drilling wells primarily focused on unconventional natural gas plays and 42 are drilling wells primarily focused on liquids-rich plays. In addition, 126 of the company's 133 operated rigs are drilling horizontal wells.

Aubrey K. McClendon, Chesapeake's chief executive officer, said the company expects to become a significant seller of leasehold in the second half of 2010 and in 2011 through planned joint venture transactions after a "very aggressive effort" to capture leasehold in the first half of this year in a large number of highly competitive liquids-rich unconventional plays.

"Chesapeake's goal is to reach a balanced mix of natural gas and liquids revenue as quickly as possible. We plan to shift our capital spending mix between natural gas plays and liquids-rich plays to approximately 45/55 by year-end 2012. By year-end 2015, we expect to increase our liquids production to approximately 200,000 bbls per day, or approximately 25% of total production and 40% of production revenue."

Chesapeake's strategy for accomplishing its goal is to reduce drilling of natural gas wells except for those required to held-by-production leasehold or to use a drilling carry provided by a joint venture partner until such time as natural gas prices rise above $6.00 per Mcf.

As part of its strategy, the company will seek to lease and develop substantial new liquids-rich plays in which the company can acquire very large leasehold positions of 250,000-750,000 net acres.

Within one year of acquisition, Chesapeake will sell a minority interest in a new play, recovering all or virtually all of the cost to acquire the leasehold in the play and to fund approximately a significant portion of Chesapeake's future drilling costs in the play.

The company also will seek to accelerate drilling of liquids-rich plays until year-end 2012 when its drilling capital expenditures are balanced approximately 50/50 between natural gas plays and liquids-rich plays; continue adding proved reserves, net of monetizations and divestitures, of approximately 2.5 - 3.0 tcfe (415 - 500 mmboe) annually; and accomplish these goals without the issuance of additional equity and with a reduction of debt levels such that the company becomes investment grade within the next few years.