Chesapeake Energy has reported financial and operational results for Q2 2018.
“Chesapeake continues to make significant progress in achieving our strategic priorities of reducing leverage, increasing margins and reaching cash flow neutrality. Last week’s announcement to sell our Utica position will allow us to retire nearly $2 billion of outstanding debt, while the recent significant ramp in our Powder River Basin volumes position us to replace the divested Utica EBITDA within a year,” Doug Lawler, Chesapeake’s President and Chief Executive Officer, said. “For the third consecutive quarter, we have recorded impressive cash flow driven by better-than-expected oil production. We expect to see continued meaningful improvements in growing our cash flow as our total oil production, adjusted for asset sales, moves higher throughout the rest of 2018 and into 2019. Lower total debt, improving margins and greater capital efficiency are positioning Chesapeake for significant equity value creation moving forward.”
2018 Q2 Results
For Q2 2018, Chesapeake reported a net loss of $16 million and a net loss available to common stockholders of $40 million, or $0.04/diluted share. The company’s EBITDA for Q2 2018 was $382 million. Adjusting for items that are typically excluded by securities analysts, Q2 2018 adjusted net income attributable to Chesapeake was $139 million, or $0.15/diluted share, while the company’s adjusted EBITDA was $536 million.
Production expenses during Q2 2018 were $2.86/BOE, compared with $2.92/BOE in Q2 2017, primarily as a result of certain 2018 and 2017 divestitures, partially offset by increased saltwater disposal costs. General and administrative expenses (including stock-based compensation) during Q2 2018 were $1.89/BOE, compared with $1.45/BOE in Q2 2017. The increase was primarily driven by stock-based compensation awards. The company’s gathering, processing and transportation expenses decreased by 5% year over year to $7.04/BOE from $7.44/BOE during Q2 2017 primarily as a result of certain 2018 and 2017 divestitures, reduced fees due to restructured midstream contracts and lower volume commitments.
Chesapeake continues to benefit from the depth and breadth of its portfolio, which offers stacked pay potential across a diverse set of assets. The company remains focused on optimizing these resources through enhanced completions, longer laterals and spacing optimization and continues to drive costs lower to enhance its cash flow.
The Powder River Basin (PRB) in Wyoming is quickly establishing itself as the growth engine of the company, as recently demonstrated by a 78% increase in net production compared with the average Q4 2017 rate. On 22 July 2018, total net production hit a new record of approximately 32,000 net BOE/day (42% oil, 41% natural gas and 17% natural gas liquids), compared with an average Q4 2017 rate of 18,000 BOE/day. Chesapeake now projects net production from the area will reach approximately 38,000 BOE/day by year-end 2018 and expects total net annual production from the PRB to more than double in 2019 compared with 2018.
In late June and July 2018, Chesapeake placed a total of five Turner wells on production with initial daily rates ranging from approximately 1,500 BOE/day to 3,200 BOE/day, with oil production representing approximately 65%. These wells are still in flowback and cleanup, and the company expects higher rates from several over the next 30 days. The Turner program continues to deliver impressive results across a broad area, with wells now producing across an area over 20 miles wide in the field.
In April 2018, six Turner wells were placed on production and spaced at approximately 1,980 to 2,300 ft apart to test well performance with reduced spacing. As the wells continue to clean up, all six wells are currently performing as well as or better than previously unbounded wells, or wells spaced approximately 2,640 ft apart. With days on production ranging from 85 to 100, all six wells have reached daily gross production rates of approximately 1,600 BOE/day to 2,600 BOE/day, with oil production ranging from 35% to 45%.
In July 2018, Chesapeake moved to five rigs in the PRB, all of which are primarily focused on the Turner formation. The company placed nine wells on production during Q2 2018, and expects to place 14 wells on production during Q3 2018 and 14 wells on production during Q4 2018. In addition, the company is exploring the potential of adding a sixth rig in 2019 and remains encouraged about the future growth potential offered by additional formations, such as the Teapot, Parkman, Niobrara, Sussex and Mowry, among others.
To support anticipated rig activity, Chesapeake recently reached an agreement with Williams Partners and Crestwood Equity Partners for an expansion of their existing gas gathering system and processing facility at the existing competitive fee-rate structure. The company is also in active discussions with several midstream and downstream providers on awarding its crude and water gathering business in the basin.
The Eagle Ford Shale in South Texas remains Chesapeake’s EBITDA-generating backbone, consistently delivering high-margin oil volumes and stable production. The company continues to drive costs out of its operations and is currently utilizing four rigs in the Eagle Ford. The company placed 48 wells on production during Q2 2018, and expects to place 38 wells on production during Q3 2018 and 47 wells on production during Q4 2018.
Similar to the PRB, Chesapeake continues to appraise liquid-rich opportunities across its expansive acreage position in its Mid-Continent operating area in Oklahoma and is deploying advanced completions and longer laterals to test new concepts. In the meantime, Oswego volumes continue to climb, with average 30-day production rates of 1,015 BOE/day and over 80% oil cuts. Chesapeake is currently utilizing two rigs in the Mid-Continent. The company placed eight wells on production during Q2 2018, and expects to place 12 wells on production during Q3 2018 and nine wells on production during Q4 2018.
The Haynesville Shale in Louisiana continues to deliver consistent production volumes, and with approximately 75% of the development locations remaining undeveloped, offers significant potential for future growth. To date, the advances provided by enhanced completions and longer laterals, including the first 15,000-ft lateral ever drilled in the basin, have allowed the company to grow Q2 2018 production by approximately 15% year over year while utilizing the same number of rigs. Additionally, with ample takeaway capacity, Chesapeake is well positioned to access Henry Hub pricing and other premium markets. Chesapeake moved an additional rig into the Haynesville in July and is currently utilizing four rigs. The company placed 12 wells on production during the Q2 2018, and expects to place six wells on production during the Q3 2018 and nine wells on production during the Q4 2018.
Chesapeake’s premium Marcellus Shale position in Pennsylvania continues to be a significant cash flow generator for the company. The company’s enhanced completions and longer laterals continue to create additional value across the company’s Lower Marcellus and Upper Marcellus formations, and the company plans to test the deeper Utica formation found under its acreage position in 2019. In July 2018, Chesapeake successfully drilled its longest lateral to date in the Lower Marcellus Shale at approximately 13,380 ft, only to be surpassed by an even longer planned lateral of approximately 14,500 ft currently being drilled. Both wells are expected to be placed on production before year-end 2018. Chesapeake is currently utilizing three rigs in the Marcellus. The company placed 10 wells on production during Q2 2018, and expects to place 14 wells on production during Q3 2018 and 18 wells on production during Q4 2018.
Chesapeake recently announced that it has entered into an agreement to sell its interests in the Utica Shale operating area located in Ohio for approximately $2 billion, plus the right to receive an additional $100 million in consideration based on future natural gas prices, to Encino Acquisition Partners, a private oil and gas company headquartered in Houston. The transaction, which is subject to certain customary closing conditions, including the receipt of third-party consents, is expected to close in Q4 2018. Chesapeake is currently utilizing no rigs and placed seven wells on production during Q2 2018. The company expects to move two rigs back into the Utica in the near term, in accordance with the recent purchase and sale agreement signed last week regarding the asset and expects to place 14 wells on production during Q3 2018.