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Chesapeake Energy Corporation : Chesapeake Sees 90% Of 2013 Capital Marked For Liquids Plays

05/22/2012 | 02:41pm US/Eastern
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--Chesapeake reiterates plan to focus on more-profitable oil production

--Overall 2013 capital budget to shrink

--Shares down 50% year-over-year amid low natural gas prices

(Updates with details throughout, analyst comment in final paragraph.)

By Ben Lefebvre

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Chesapeake Energy Corp. (CHK) on Tuesday said it stands by its plan to expand its oil production, saying it will spend nearly all of its 2013 capital budget on drilling in oil fields.

Chesapeake, the largest natural-gas production company behind Exxon Mobil Corp. (XOM), has seen its stock plummet in the past year as gas supply has reached a seasonal record. Its plan to shift away from gas to more-profitable oil suffered a setback in the first quarter when the company said it had missed its oil-production target.

"We're working hard to escape the gravity of natural-gas prices," Jeff Mobley, Chesapeake's senior vice president of investor relations, told an audience at the UBS Global Oil and Gas Conference. "The vast majority of capital--90% next year--is going toward liquid-rich plays."

About 40% of Chesapeake's planned $7 billion capital budget in 2013 is earmarked for drilling in the liquids-rich Eagle Ford shale formation in South Texas, Mobley said. The company plans to shrink its 2013 capital budget from a planned $9.1 billion in 2012.

The company still plans on spending 7% of its capital budget on dry gas production despite gas prices being stuck under $3 per million British thermal units. Prices have only started recovering after hitting a decade low of $1.90 in late April, a drop caused by a mild winter that cut demand for home heating and resulted in an overhang of gas supplies.

Natural gas was trading at $2.69 a million British thermal units Tuesday, down 12% year to date.

Mobley said Chesapeake is "progressing" in its planned sale of prime oil real estate in the Permian Basin in West Texas, with a deal possible by the third quarter. Chesapeake hopes to sell up to $11.5 billion in assets to bring its debt down to $9.5 billion by the end of 2012.

Chesapeake shares are down more than 51% year over year amid sinking gas prices and claims that company chief executive and co-founder Aubrey McClendon made personal financial transactions with companies doing business with Chesapeake, deals that critics have said smack of conflict-of-interest.

The Oklahoma City company could turn things around on the inherent value of its assets, said Fadel Gheit, senior energy analyst at Oppenheimer & Co. "Although Chesapeake is fighting an uphill battle, we think its net asset value, after the pending asset sales, is several times its current share price," Gheit said in an research note.

-By Ben Lefebvre, Dow Jones Newswires; 713-547-9201; ben.lefebvre@dowjones.com; Twitter: @bjlefebvre

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