REMARKS OF CHESAPEAKE ENERGY ACTING CEO STEVE DIXON
OKLAHOMA CITY (APRIL 1, 2013) – Chesapeake Energy Corporation (NYSE:CHK) acting CEO Steve Dixon made the following remarks today on a national conference call:
I would like to begin by expressing our sincere appreciation and gratitude to Aubrey for his leadership, dedication and contributions to the company – and to our entire industry – over the past 24 years. I personally would like to thank Aubrey for his wisdom, guidance and friendship during the 22 years we have partnered together at Chesapeake and I certainly wish him well in his future endeavors.
Looking ahead, I am very excited for Chesapeake’s future – and our senior management team is energized about our opportunities ahead as we convert the great resources we have discovered and captured into production, cash flow and investor returns.
Our management team and Board of Directors are well-aligned in our objectives and strategy to take Chesapeake forward. We will remain focused on increasing our liquids production, driving capital efficiencies across our business and enhancing our financial flexibility to prudently fund our future growth.
Maintaining our culture of excellence at Chesapeake is also a priority and we will continue to conduct our business with the same urgency, intensity and attention to detail that we have always had.
Shifting to our operations, I am pleased to report that we are achieving many important objectives and surpassing notable production milestones. Our current levels of drilling and completion and leasehold capital expenditures are on a pace below our budgeted expenditure plan for the year. While expenditures are on-track to come in under budget in the first quarter, we are also delivering on planned production targets, despite challenges from winter storms in the Mid-Continent and several midstream outages and delays.
We have recently averaged an all-time high water mark in average daily net liquids production at 160 thousand barrels per day. We have also recently exceeded 4 bcfe per day of production, having regained this level following the sale of production from recent transactions in the Permian Basin, the Mid-Continent and other areas.
We are also making great progress on cost reductions and are on track for our lease operating expenses and G&A expenses to come in at or below budget this year.
Turning to asset sales, we have completed or signed up approximately $1.5 billion of sales as part of our plans for $4-7 billion of sales this year – and we are on track to execute agreements for additional sales in the next few months that we look forward to sharing with you once definitive agreements are reached.
We are particularly pleased at the market’s response to multiple small asset packages we have offered. These packages represent very good opportunities for development and exploratory drilling that Chesapeake will not be in a position to exploit in the near-term, yet can provide great value to our asset buyers. While many of these assets may not be individually noteworthy to investors, in aggregate, the combined value that we anticipate collecting during the year will likely be very meaningful and lead to further progress in improving our balance sheet.
We have also taken advantage of the recent surge in natural gas prices to lock in additional price protection for 2013 – and we have begun to hedge natural gas production for 2014 at prices well above four dollars – a level the market has not seen for quite some time.
Now turning to specific plays, I would first like to highlight several positive developments underway in our Utica Shale play in eastern Ohio and western Pennsylvania. As many of you know, Chesapeake discovered the play in 2010 and completed an important joint venture with Total in 2010. We are the largest leaseholder with approximately 1 million net acres in the play. To date we have drilled more than 240 wells in the Utica, representing approximately 75% of the wells drilled in the entire play thus far.
As a result of infrastructure constraints, we currently have turned to sales just 54 wells, but we anticipate a substantial ramp up in completions as we progress through the year. We are only producing 75 million cubic feet equivalent (mmcfe) per day from the play, net to Chesapeake, due to processing constraints, but we believe this well set is capable of producing approximately double this level if unconstrained. We are targeting net production of more than 330 mmcfe per day, or 55,000 barrel of oil equivalent (boe), from the play by the end of the year. Achieving this level will be dependent on the timely startup of critical processing infrastructure at multiple facilities in the months ahead.
As an example of the outstanding recent well results we are achieving in this play, we recently completed a six well program on our Scott Unit in Carroll County, Ohio. We drilled six wells from a common PAD with average 24-hour restricted test rates of 1,250 boe per day, which included 310 barrels of oil, 200 barrels of NGL, with ethane not recovered, and 4.4 mmcf of natural gas per day, at flowing tubing pressures exceeding 3000 psi. Well costs for this group averaged approximately $6.5 MM, indicating just some of the potential cost savings we expect to realize as our operations mature and we focus on development in the future.
I would also note that we have recently submitted 2012 annual production data and other information on our wells drilled in 2011 and 2012 to the Ohio Department of Natural Resources. This data will be available publicly, perhaps later this week. Due to the infrastructure constraints I mentioned before, it was necessary to curtail and restrict production on the wells placed into service last year. As a result, we believe the data reported to the ODNR is not indicative of the productive capacity of Utica Shale wells in our development fairway.
Based on Chesapeake’s geoscientific, petrophysical and engineering research during the past two years – and the results and detailed analysis of wells we have drilled to date – Chesapeake is targeting ultimate reserve recoveries of 5 to 10 billion cubic feet equivalent (bcfe) per well in the Utica, depending on location and commodity mix within the play.
Our analysis of the play to date indicates a very prolific resource base is in place that varies across the play with an increasing condensate yield from east to west following a strong correlation to reservoir maturity.
Given our view of per well reserve and production potential and in consideration of product mix, planned well costs and current market prices, we are targeting drilling rates of return of 30-80% with an average return in excess of 40% within our joint venture AMI with Total, which is largely in the wet gas window of the play.
Turning to the Eagle Ford Shale play in South Texas, I am pleased to report that we continue to achieve strong operating results. We recently established a daily record high of 124,000 barrels per day of gross operated oil production, or approximately 56,000 barrels per day net to Chesapeake. We believe our gross operated production level potentially ranks Chesapeake as the second largest oil producer in the play and further validates the quality of our Eagle Ford asset base.
Our total daily net production from the Eagle Ford has recently averaged 80,000 boe per day and we are targeting total daily net production of more than 92,000 boe per day by year-end – even after selling net production of approximately 5,000 boe per day associated with our Northern Eagle Ford asset package that is currently on the market. This strong growth will be generated from the completion and first production from more than 400 gross wells this year.
Our margins in the Eagle Ford continue to be strong, particularly as a result of the premium pricing for crude oil that is being sold based on LLS pricing that has remained well above WTI pricing. Looking forward, we anticipate further margin expansion though transportation cost reductions and better access to premium markets as a result of the startup of multiple important pipeline projects this year.
In terms of capital efficiency, we continue to make good progress at reducing well costs in the Eagle Ford through reduced cycle times, further economies of scale and optimized completions. Our well costs for a 6,300 foot lateral well have decreased from over $9 million early in the play to approximately $7 million currently. Once we largely complete our drilling campaign in the play to hold leases by production late this year, we believe we can drive well costs down further to the $6 million range by utilizing existing infrastructure and by capitalizing on pad-development efficiencies.
As a reminder, we are allocating the largest percentage of our drilling and completion capital expenditure budget to the Eagle Ford Shale this year representing approximately 35% of our planned drilling and completion capital expenditures.
We are also beginning to test the merits of increased density drilling on our acreage with pilot programs under way to evaluate well performance on 350 foot offset spacing – which equates to roughly 50 acre well spacing. If successful, this development approach would increase our drilling inventory meaningfully from the 500 foot or 70 acre well spacing development plan we currently assume.
In summary, the leadership transition at Chesapeake is being implemented smoothly and successfully – and we are very pleased with the operational results our company is delivering as highlighted by the two examples provided today. We look forward to sharing our first quarter financial results and provide a more detailed update on our asset sales initiatives soon.
Chesapeake Energy Corp,the Oklahoma-based firm is the No. 1 driller in Ohio.
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