- Pending exchange with RKI increases
Chesapeake’s net acreage position and working interest in the
Powder River Basin to 388,000 and 79%, respectively
- Company estimates potentially
recoverable gross resources of more than 2 billion boe on its
Powder River Basin acreage
- Agreed in principle to repurchase
Utica subsidiary preferred shares eliminating Chesapeake’s highest
cost leverage instrument and approximately $75 million in annual
cash dividend payments
Chesapeake Energy Corporation (NYSE:CHK) announced today that it
has entered into an agreement with RKI Exploration &
Production, LLC (RKI) to exchange nonoperated interests in
approximately 440,000 gross acres in the Powder River Basin (PRB)
in southeastern Wyoming. Under the agreement Chesapeake will convey
to RKI approximately 137,000 net acres and its interest in 67 gross
wells, with an average working interest of 22% in the northern
portion of the PRB (“Northern Area”), where RKI is currently
designated operator. In exchange RKI will convey to Chesapeake
approximately 203,000 net acres and its interest in 186 gross
wells, with an average working interest of 48% in the southern
portion of the PRB (“Southern Area”), where CHK is currently
designated operator. In addition to the exchange of acreage,
Chesapeake will pay RKI $450 million in cash. The transaction,
which is subject to certain closing conditions including the
receipt of third-party consents, is expected to close in August
2014.
Upon closing of the acreage exchange, Chesapeake’s PRB acreage
will be concentrated in the Southern Area. It will operate nearly
100% of its 388,000 net acres in the PRB, and will hold an
approximate 79% average working interest. Chesapeake currently
holds approximately 322,000 net acres in the PRB with a 38% average
working interest.
Anticipated key benefits of the RKI acreage exchange include the
following:
- Increases Chesapeake’s PRB holdings by
66,000 net acres and average working interest from 38% to 79%;
- Consolidates Chesapeake’s position in
the Southern Area, which offers multiple stacked oil pay zones with
potentially recoverable gross resource estimated to be in excess of
2 billion barrels of oil equivalent (boe); and
- Adds net incremental production of
approximately 4,500 boe per day.
Chesapeake’s recent PRB highlights include:
- In the Niobrara formation, Chesapeake
has achieved a greater than 50% reduction in drilling cost per foot
over the past two years. Coupled with planned longer laterals and
completion improvements, single-well rate of return potential is
targeted to exceed 40%, assuming a constant West Texas Intermediate
(WTI) crude oil price of $90 per barrel and a Henry Hub natural gas
price of $4 per thousand cubic feet (mcf);
- Chesapeake recently drilled a record
9,600-foot lateral Niobrara well in 32 days with a drilling cost of
approximately $5 million, compared to 2013 vintage Niobrara wells
with an average lateral length of 5,300 feet and average drilling
cost of $6.6 million;
- The company’s initial Sussex formation
test well (the “Sussex I”), which was placed on-line in January,
2014, has produced approximately 232,000 boe in 150 production days
and continues to produce in excess of 1,500 boe per day;
- Chesapeake’s recent delineation well
(the “Sussex III”), which is situated approximately 20 miles north
of the Sussex I, produced at an initial 24-hour average rate in
excess of 1,000 boe per day (approximately 85% oil) and
substantially de-risks the northern end of the Sussex field
estimated to be approximately 20 miles long by five miles wide;
and
- The company estimates the Sussex
formation offers single-well rate of return potential of greater
than 50%, consisting of more than 75% oil with a favorable API
gravity of 40 to 48 degrees.
Doug Lawler, Chesapeake’s Chief Executive Officer, commented,
“We are excited to increase our position in this outstanding asset
and consolidate our acreage, working interest and operatorship in
the southern end of the Powder River Basin. Excellent results to
date from the Niobrara and Sussex formations, coupled with
additional stacked pay potential in other Upper Cretaceous sands as
well as the Frontier and Mowry formations, demonstrate the
potential of the Powder River Basin to be a major oil growth engine
for the company.”
The company has posted slides to the Investor page of its
website, www.chk.com, which contain further information about the
acreage exchange and its PRB assets.
Repurchase of Utica Subsidiary Preferred Shares
Chesapeake also announced that it has agreed in principle to
repurchase all of the outstanding preferred shares of its
unrestricted subsidiary, CHK Utica, L.L.C. (CHK Utica) from
third-party preferred shareholders. Under the agreement, Chesapeake
will pay approximately $1.26 billion to repurchase 1,060,000
preferred shares of CHK Utica. The proposed transaction, which is
expected to close today, will retire Chesapeake’s highest cost
leverage instrument and eliminate approximately $75 million in
annual cash dividend payments to third-party preferred
shareholders.
Domenic J. Dell’Osso Jr., Chesapeake’s Chief Financial Officer,
commented, “We are very pleased with the performance of our Utica
assets, and as we continue to execute on our strategy of
eliminating financial complexity, we believe that this is an
opportune time to repurchase the remainder of the CHK Utica
preferred shares at a price that is accretive to net present
value.”
Chesapeake plans to fund the cash portion of the RKI acreage
exchange and the repurchase of the CHK Utica preferred shares with
available liquidity, including nearly $1.5 billion of unrestricted
cash held on its balance sheet as of June 30, 2014. Chesapeake
continues to refine its portfolio to focus on assets that best
align with the company’s strategy of profitable growth from
captured resources and expects to close additional sales of noncore
assets, including non-E&P assets, by the end of 2014.
Natural Gas, Natural Gas Liquids (NGL) and Oil Price
Update
During the 2014 second quarter and continuing into July,
Chesapeake and other natural gas producers in the Marcellus shale
experienced significant weakening of natural gas price
differentials relative to the Henry Hub benchmark natural gas
price. At certain delivery points during the 2014 second quarter,
particularly Dominion South, Tetco M3, TGP Zone 4 and Transco
Leidy, the company experienced basis discounts to Henry Hub prices
between $0.92 and $2.32 per mcf, which was significantly wider than
forecasted. As a result, the realized price after gathering,
transportation, and basis on its Marcellus North natural gas
production (approximately 29% of total company natural gas
production), is expected to average $2.47 per mcf below Henry Hub
during the 2014 second quarter, compared to an average discount of
$0.18 per mcf that the company received for its Marcellus North
production during the 2014 first quarter. Chesapeake’s companywide
natural gas price differential is expected to average ($1.91) per
mcf during the second quarter of 2014 and its realized natural gas
price after hedges is expected to average $2.45 per mcf, compared
to a companywide differential of ($1.08) per mcf and a realized
natural gas price after hedges of $3.27 per mcf in the 2014 first
quarter.
Chesapeake’s realized NGL price during the 2014 second quarter,
after processing and transportation costs, is expected to be $21.03
per barrel, compared to an average realized price per barrel of
$29.23 during the 2014 first quarter. The decrease in NGL price
realizations during the 2014 second quarter was primarily due to
weakness in ethane prices and lower seasonal demand for propane and
butane. Chesapeake’s average NGL price per barrel as a percentage
of the average WTI crude oil price, before processing and
transportation costs, is expected to be 34% during the 2014 second
quarter, compared to approximately 47% of WTI that was realized
during the 2014 first quarter.
Chesapeake’s realized oil price during the 2014 second quarter,
after hedging, processing and transportation costs, is expected to
be $85.23 per barrel, compared to an average realized price per
barrel of $85.08 during the 2014 first quarter. The company’s
differential to the average WTI crude oil price is expected to be
($5.50) per barrel in the 2014 second quarter compared to ($5.08)
per barrel in the 2014 first quarter. The increase was primarily
driven by a temporary outage of a third-party crude oil pipeline
and a contraction in the premium between Louisiana Light Sweet
crude oil prices, the benchmark for all of Chesapeake’s Eagle Ford
Shale production, and WTI prices during the second quarter.
Chesapeake Energy Corporation (NYSE:CHK) is the
second-largest producer of natural gas and the 10th largest
producer of oil and natural gas liquids in the U.S.
Headquartered in Oklahoma City, the company's operations are
focused on discovering and developing its large and geographically
diverse resource base of unconventional natural gas and oil assets
onshore in the U.S. The company also owns substantial
marketing and compression businesses. Further information is
available at www.chk.com where Chesapeake routinely
posts announcements, updates, events, investor information,
presentations and news releases.
This news release includes "forward-looking statements” within
the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are statements other than statements of
historical fact that give our current expectations or forecasts of
future events. They include expected production from the assets to
be acquired from RKI, estimated potentially recoverable gross
resource in the PRB Southern Area, projected rates of return of PRB
wells, effect of recent well results on future drilling risk,
expected efficiency gains, planned funding of the RKI and CHK Utica
transactions, anticipated asset sales, and expected commodity price
realizations. Although we believe the expectations and forecasts
reflected in the forward-looking statements are reasonable, we can
give no assurance they will prove to have been correct. They can be
affected by inaccurate assumptions or by known or unknown risks and
uncertainties.
Factors that could cause actual results to differ materially
from expected results include those described under "Risk Factors”
in Item 1A of our 2013 annual report on Form 10-K filed with the
U.S. Securities and Exchange Commission on February 27, 2014. These
risk factors include the volatility of natural gas, oil and NGL
prices; the limitations our level of indebtedness may have on our
financial flexibility; declines in the prices of natural gas and
oil potentially resulting in a write-down of our asset carrying
values; the availability of capital on an economic basis, including
through planned asset sales, to fund reserve replacement costs; our
ability to replace reserves and sustain production; uncertainties
inherent in estimating quantities of natural gas, oil and NGL
reserves and projecting future rates of production and the amount
and timing of development expenditures; our ability to generate
profits or achieve targeted results in drilling and well
operations; leasehold terms expiring before production can be
established; hedging activities resulting in lower prices realized
on natural gas, oil and NGL sales; the need to secure hedging
liabilities and the inability of hedging counterparties to satisfy
their obligations; drilling and operating risks, including
potential environmental liabilities; legislative and regulatory
changes adversely affecting our industry and our business,
including initiatives related to hydraulic fracturing, air
emissions and endangered species; a deterioration in general
economic, business or industry conditions having a material adverse
effect on our results of operations, liquidity and financial
condition; oilfield services shortages, gathering system and
transportation capacity constraints and various transportation
interruptions that could adversely affect our revenues and cash
flow; adverse developments and losses in connection with pending or
future litigation and regulatory investigations; cyber attacks
adversely impacting our operations; and an interruption at our
headquarters that adversely affects our business.
In addition, the transaction with RKI is subject to closing
conditions, including third-party consents, and it and the
repurchase of the CHK Utica preferred shares may not be completed
in the time frame anticipated or at all. Chesapeake’s interest in
the properties acquired in the RKI exchange will be reduced if
applicable participation rights are exercised and other conditions,
including payment to Chesapeake of consideration for such
participation, are fulfilled. We use the term "recoverable gross
resource" to describe Chesapeake's internal estimates of volumes of
natural gas and oil that are not classified as proved reserves but
are potentially recoverable through exploratory drilling or
additional drilling or recovery techniques in the Southern Area.
Estimates of unproved resources are by their nature more
speculative than estimates of proved reserves and accordingly are
subject to substantially greater risk of actually being realized by
the company. We believe our estimate of unproved resources is
reasonable, but our estimate has not been reviewed by independent
engineers. Estimates of unproved resources may change significantly
as development provides additional data, and actual quantities that
are ultimately recovered may differ substantially from prior
estimates. Our production forecasts are also dependent upon many
assumptions, including estimates of production decline rates from
existing wells and the outcome of future drilling activity.
We caution you not to place undue reliance on our
forward-looking statements, which speak only as of the date of this
news release, and we undertake no obligation to update any of the
information provided in this release, except as required by
applicable law.
Chesapeake Energy CorporationInvestor Relations:Gary T. Clark,
CFA, 405-935-8870ir@chk.comorMedia Relations:Gordon Pennoyer,
405-935-8878media@chk.com
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