Chesapeake: NGLs To Deliver Long-Term Growth

Jul.11.14 | About: Chesapeake Energy (CHK)


Chesapeake has raised its production growth target, driven primarily by better natural gas liquids volumes.

The company expects NGL production to grow by 63%-68% during 2014.

With the newly built ATEX pipeline in the Utica shale, the company is positioned to transport much-needed capacity from the shale.

The increased capital spending signifies that the company is on-track to meet its long-term production targets.

The spin-off and divestment of assets resulted in a decreased burden of debt for the company.

Chesapeake Energy (NYSE:CHK) raised its 2014 total production growth outlook to 9%-12%, up from the previous estimate of 8%-10%, driven by better natural gas liquids volumes. In addition, since the company has shifted its focus on the liquid-rich plays, its liquid production is expected to increase by approximately 29%-33% in 2014. The company also expects capital expenditure in the range of $5.0 billion-$5.4 billion, as it is planning to drill more than 260 wells over the next two years.

Moreover, the company has recently taken certain steps that will result in reduced leverage. It is desirable to discuss the deals that will allow the company to offload debt from its balance sheet. I will also analyze whether or not the company will be able to meet its production targets.

Shift Towards Liquid-Based Production

Chesapeake delivered a 55% increase in the production of natural gas liquids (NGLs), bringing the total production to 7.6 million barrels. The growth is primarily driven by strong production in the Marcellus and Utica regions. The NGL operation expanded at a faster pace than the company's oil or gas production. Given the higher production from its Mid-Continent, Eagle Ford and Utica shales, the company expects NGL to account for 13% of the company's total output.

The lack of infrastructure was the biggest problem in the Utica shale. However, with the commencement of shipments on pipelines, such as the ATEX pipeline that provides access to the Gulf, the company now has the ability to transport much-needed capacity from the shale. Consequently, Chesapeake's production from the Utica shale has also increased by approximately 422% compared to last year. Moreover, the natural gas liquids production has accounted for roughly 30% of its Utica volumes.

The higher ethane recovery from its natural gas production also helped the company's NGL production. Chesapeake has indicated that it would be recovering a greater percentage of ethane from its gas stream. As a result, natural gas liquids production will be boosted, while keeping the natural gas prices low. NGLs contain a mix of hydrocarbons, such as ethane, propane, butane, isobutene and pentane. These hydrocarbons have different applications and are traded at different prices in the market.

Reduced Burden of Debt

With the recent deals concluded by the company, Chesapeake expects to reduce its debt burden by $3 billion. The spin-off of Chesapeake Oilfield Operating Company into Seventy Seven Energy will help the company to shed $1.1 billion of debt. Similarly, the transfer of shares of Chesapeake Cleveland Tonkawa to preferred shareholders will also eliminate $1 billion in equity attributable to third-parties. It will also allow the company to shed $160 million of liabilities from the balance sheet.

The selling of non-core assets in Oklahoma and Texas will also ensure an inflow of approximately $310 million in cash. The company also ensured another inflow of $290 million by selling its non-core acreage with minimum production in Southwest and Powder River Basin. Although these asset sales will reduce the company's production by only 2%, it will also substantially reduce the amount of liabilities from the balance sheet. These steps will ensure reduced costs and debt on one hand, and increased market value of its assets on the other. So far, the company has generated around $925 million by disposing of its assets, and aims to generate roughly $4 billion by the end of 2014.

Concluding Remarks

With the divestment of less profitable properties, Chesapeake has enjoyed a decline in production costs. The company has also accumulated considerable cash resources by divesting of these assets. The company is also determined to sell its non-core assets in Southwestern Oklahoma, as well as in Eastern and Southern Texas. These sales will further lower production costs, which will result in improved margins in the long term.

Chesapeake is putting efforts into developing the Utica and Marcellus shales to meet the long-term objective of 1 million barrels of oil equivalent production per day. To do so, it has allocated $5 billion of capital expenditure, which will help the company to drill more than 260 wells in the next couple of years.

The company is making the right moves by expanding its NGL production, as the NGL production will be contributing 13% of the total production in 2014. With the premium prices of NGL over natural gas prices, the company is well-positioned to improve its profitability in the years to come.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.