April 1, 2013 5:13 pm

Chesapeake foresees higher gas prices

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Nomac Drilling Corp. floorman Matthew Brown, right, steadies a section of drill pipe as floorman Richard Lane cleans the connection during natural gas drilling operations for Chesapeake Energy Corp. in Bradford County, Pennsylvania, U.S., on Tuesday, April 6, 2010. Companies are spending billions to dislodge natural gas from a band of shale-sedimentary rock called the Marcellus shale that underlies Pennsylvania, West Virginia and New York©Bloomberg

Chesapeake Energy is locking in prices for next year’s gas sales at “well above” today’s levels, the US shale gas and oil producer said, in the latest sign of how the market is beginning to tighten.

Steve Dixon, Chesapeake’s acting chief executive, told analysts on Monday that the company had “taken advantage of the recent surge in natural gas prices” to lock in prices for more of its planned sales in 2013. It had also begun hedging for 2014 at prices “well above $4” per million British thermal units, “a level the market has not seen for quite some time”, he said.

However, he said Chesapeake would not be taking advantage of the higher prices to step up its gas production, and would instead continue to focus on developing its more profitable oil reserves.

Benchmark US natural gas last week closed above $4 per mBTU for the first time in a year and a half, having doubled over the past 12 months, thanks to cold weather and production that has been roughly flat for more than a year.

The recovery of the natural gas price will help stabilise the financial outlook for Chesapeake, which is trying to cut the debt burden built up under its founder and former chief executive Aubrey McClendon, who retired from the company on Monday.

However, the immediate impact will be limited because Chesapeake has already hedged 72 per cent of this year’s expected revenues, after its 2012 revenues had been hammered by the decision not to hedge before gas prices fell to 10-year lows.

The company said last month it was expecting operating cash flow of about $5bn this year, which was short of the roughly $6bn that it expected to spend drilling and completing wells.

Mr Dixon, who is acting CEO while the company searches for a permanent replacement for Mr McClendon, told analysts that efficiency gains meant he had “tremendous confidence” that costs would be “on or under budget this year”.

For example, he said, 6,300-foot horizontal oil wells in the Eagle Ford shale of southern Texas had initially cost about $9m each, but were now down to $7m, and Chesapeake expected to cut the cost further to $6m.

The company planned to spend about 35 per cent of its total investment this year in drilling and completing wells in the Eagle Ford region, he added.

Chesapeake believes it may be the second-largest oil producer in the Eagle Ford shale, with output of 56,000 barrels per day. Its total production of oil and natural gas liquids has reached 160,000 b/d, up from just 30,000 b/d at the start of 2009.

In spite of the company’s hopes of rising revenues and falling costs, however, it is sticking to its target of raising $4bn-$7bn from asset sales this year. Mr Dixon said $1.5bn of that had already been agreed, including the $1bn deal for Sinopec of China to buy a 50 per cent stake in gas and oilfields in the Mississippi Line formation in Oklahoma and Kansas.

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