Barnett Shale

Chesapeake squeezes out first-quarter profit of $15 million

Chesapeake Energy, in its first earnings report since the departure of former CEO Aubrey McClendon on April 1, said it earned $15 million despite nearly $180 million in one-time charges. The Oklahoma City-based producer, which is the second-largest operator in the Barnett Shale, said revenues jumped $1 billion in the quarter to $3.4 billion on higher product prices and a 9 percent gain in production from a year ago. Oil production was up 56 percent from a year ago, said acting CEO Steve Dixon. After adjusting for unusual items, Chesapeake earned $183 million, or 30 cents a share, compared to Wall Street's consensus estimate of 25 cents. But the company's shares (ticker: CHK) were down in early trading.

The company said it averaged 83 drilling rigs in the quarter and spent $1.5 billion on drilling and competitions, versus just $45 million for unproved acreage. CFO Domenic Dell'Osso said Chesapeake will "devote more than 80 percent of our total capital expenditures to drilling and completion activities in 2013, as compared to an average of approximately 50 percent over the past three years." The company said it closed or signed about $2 billion worth of asset sales so far this year and expects between $4 billion and $7 billion in asset sales during 2013.

--- Jim Fuquay

Ex-Chesapeake CEO McClendon forms new energy company

Aubrey McClendon, who effective April 1 left Chesapeake Energy, the company he co-founded, has formed a new energy company named American Energy Partners LP, The Oklahoman reports. Citing an e-mail that the newspaper says was sent Tuesday to a number of people in the energy industry, "McClendon wrote that he has founded and serves as the chairman and CEO of American Energy Partners. McClendon said in the email that American Energy Partners is looking to acquire onshore assets in the United States," according to the report on the newspaper website. “My goal is to build a substantial E&P (exploration and production) company both through the drillbit and through acquisitions of producing properties,” McClendon says in the email. “In particular, I will be looking for deals with a lot of drilling left on them and will also consider undeveloped acreage deals — plus, I am not scared of natural gas.”

A link to The Oklahoma's report is here.

-- Jim Fuquay

Fort Worth independent acquires East Texas acreage from Chesapeake

Energy & Exploration Partners, a Fort Worth-based producer, said Monday it acquired 57,275 net acres and 11 producing wells in East Texas from Chesapeake Energy. The company is backed by Apollo Investment Corp. and Highbridge Principal Strategies, which were issued notes in connection with the transaction. The acreage is in Madison and Grimes counties, which are between Huntsville and College Station. Energy & Exploration Partners said it has an additional 14,600 acres in the area, and it plans to acquire 330 square miles of 3D seismic. CEO Hunt Pettit said the company plans "to commence a two-rig drilling program on the acreage acquired from Chesapeake."

According to its news release on the acquisitions, Energy & Exploration Partners said it has interests in West Texas and the Rocky Mountains.

-- Jim Fuquay

Landowners sue Chesapeake over royalty payments

Nearly two dozen Tarrant County landowners, including Fort Worth billionaire Ed Bass, have sued Chesapeake Energy in federal court in Dallas, claiming the producer shorted them on royalty payments. According to the suit filed Wednesday, Chesapeake Operating and Chesapeake Exploration, which hold leases on nearly 4,000 acres owned by the plaintiffs, passed on production costs in breach of their leases and imposed other costs improperly. The suit also claims the company used two affiliates to set below-market sales prices for natural gas produced from the leases. Julie Wilson, Chesapeake's vice president for urban development in the Barnett Shale, declined to comment.

For more, see the Star-Telegram's report.

-- Jim Fuquay

Average Barnett Shale well likely to have lower production than many producers expected, new study says

Productivity in the Barnett Shale varies widely across the big natural gas field, where an average horizontal well can be expected to produce about 1.44 billion cubic feet of gas over its life, according to preliminary results of a comprehensive study by the Bureau of Economic Geology at the University of Texas. Wells in the richest portions of the field can top that and be profitable even at relatively low prices, while those in the poorest areas likely can't make money even at record high gas prices. Some results of the study could be released publicly as early as this month or in March, said Scott Tinker, the bureau's director.

The bureau looked at more than 16,000 Barnett wells drilled through June 2011 to make its estimates. Tinker told the Star-Telegram that if no more wells were drilled in the North Texas field, they would ultimately produce between 22 and 23 trillion cubic feet. But he expects the field's total production to be considerably more than that. "You'll see at least three times that before the field is put to bed, and possibly more than that," he said. The 1.44 bcf figure, called the estimate ultimate recovery, or EUR, is considerably less than the 2 bcf to 3 bcf EUR that many producers have historically estimated. But representatives of the field's two largest producers, Devon Energy and Chesapeake Energy, told the newspaper they still expect their Barnett wells to live up to the companies' forecasts.

For a complete report, see today's Star-Telegram. A link is here.

-- Jim Fuquay

Chesapeake calls McClendon's departure "termination without cause"

Chesapeake Energy in a government filing this morning said CEO Aubrey McClendon's "departure from the company will be treated as a termination without cause under his employment agreement," a move that allows millions in payments. On Tuesday, the company announced McClendon would retire effective April 1. The easy part of figuring how much McClendon, who co-founded Chesapeake in 1989, will get when he leaves is his cash salary and bonus. The company said he's entitled to a base salary of $975,000 and annual bonus of $1.95 million for another four years. That's $2.925 million a year, or  $11.7 million total,  payable "in equal installments" as normal payroll, his employment contract says. After that it gets complicated, but Bloomberg News reported that McClendon is entitled to another $34 million "in accelerated vesting of restricted stock that he was awarded previously."

That raises the total compensation to $45.7 million. The Wall Street Journal estimated the value at "under $50 million." Both Bloomberg and The Wall Street Journal, citing unnamed sources, both reported that the company will not "claw back" any of the $75 million it granted McClendon in 2008 following a collapse in the company's share price that forced McClendon to sell nearly all his 33.5 million shares in Chesapeake. Bloomberg estimated that foregone value of the clawback at $11 million.

According to McClendon's employment agreement, termination with cause would have meant "the company will not have any obligation to provide any further payments or benefits to the executive  after the effective date of such termination."

-- Jim Fuquay

McClendon will retire from Chesapeake on April 1

Chesapeake Energy co-founder and longtime CEO Aubrey McClendon, 53, will retire from the embattled energy producer on April 1 "and will continue to serve as Chief Executive Officer until his successor is appointed," when he will also leave the company's board of directors, the Oklahoma City-based company announced this afternoon.

Chesapeake also said today that its own examination of McClendon's use of borrowings to fund his participation in Chesapeake's wells "to date has not revealed improper conduct by Mr. McClendon."

The company also said McClendon's retirement "is not related to the board's pending review of his financing arrangements and other matters."

While McClendon's right to acquire a stake in the company's wells were disclosed, the British news agency Reuters reported last year that McClendon had borrowed money to finance his participation from companies that also lent to Chesapeake, which raised questions.

In a prepared statement, McClendon said:

“Over the past 24 years, I have had the privilege of developing Chesapeake into one of the world’s premier energy companies. It has been an honor to work with my outstanding management team and the company’s 12,000 very talented and dedicated employees. I am extremely proud of what we have built over the last quarter of a century, and I am confident that Chesapeake is in a great position to continue to grow and achieve great success in the future as it realizes the full value of its outstanding assets. While I have certain philosophical differences with the new Board, I look forward to working collaboratively with the company and the Board to provide a smooth transition to new leadership for the company.” 

Julie Wilson, Chesapeake's top officer in the Barnett Shale, said in an email: " I have always been proud to work for Aubrey McClendon. I remain honored to work for Chesapeake Energy." The company has about 500 employees in North Texas, including a large Fort Worth office.

-- Jim Fuquay

Devon Energy still No. 1 in the Barnett Shale

Last month we published an item noting that by the Texas Railroad Commission's count, Chesapeake Energy had edged past Devon Energy as the biggest  gas producer in the Barnett Shale as of June, the latest figures at the time. But both companies quickly questioned the numbers and we qualified our report, with good reason as it turns out. Gene Powell, the data dean of the Barnett Shale and publisher of Powell Shale Digest, just ran the numbers for production through October 2012, the latest available from the Railroad Commission, and Devon is still No. 1, just ahead of Chesapeake. Both are well ahead of No. 3 XTO Energy.

According to Powell's numbers, Devon in October averaged 1.495 billion cubic feet a day. Chesapeake averaged 1.375 Bcf/d and XTO averaged 826 million cubic feet a day. The difference maker is wells in the Railroad Commission's pending file, which contains wells that are backlogged or contain incomplete information. Production from those wells doesn't  show up on the Railroad Commission's Barnett Shale summary page. Based on our recent conversations with both producers, Devon last year drilled about 300 wells, vs. Chesapeake's fewer than 100, so perhaps that has something to do with it.

Powell notes that the Barnett Shale was still chugging along at 5.2 Bcf/d in October despite the sharp decline in drilling in the field. Some of that doubtless is because wells drilled in the past were finally connected to a sales line. For example, Chesapeake only last year laid an 8-inch line to its Westgate padsite on the southern edge of downtown Fort Worth, and that well was drilled in 2008 and completed in 2009. See our item here. But operators also say that despite their deserved reputation for sharp production declines in the early years, Barnett wells are proving to be pretty decent long-term producers. We've run some numbers ourselves using Powell's data and wells that are 10 years old still produce 11 percent of their peak initial production, while those 20-30 years old are still producing on average 10 percent of their peak. Of the 85 Barnett Shale wells 20 years old or older, all but four were still producing in June, the latest month we have. They averaged 99,000 cubic feet a day.

-- Jim Fuquay

Cheniere signs deal with Total for LNG exports

Houston-based Cheniere Energy said today its Sabine Pass Liquefaction subsidiary agreed to sell liquefied natural gas equivalent to about 91.25 billion cubic feet a year to Total Gas and Power North America. It said today it will also sell another 13.5 bcf equivalent on a seasonal basis from the Gulf Coast facility being built. Those volumes are equal to about 2 million metric tonnes of LNG a year. (A tonne, or 1,000 kilograms, is about 2,200 pounds, or 1.1 tons U.S.). Each of five planned "trains," or LNG processing lines, is expected to have a capacity of 4.5 million tonnes a year. Two trains are under construction, Cheniere said, and two more will begin construction in 2013. The deal runs for 20 years once Cheniere brings the fifth train online, and can be extended another 10 years, the company said. "Deliveries from train five are expected to occur as early as 2018," Cheniere said. Total, a French energy firm, has invested in U.S. shale gas assets, including $2.25 billion nearly two years ago for a 25 percent stake in Chesapeake Energy's Barnett Shale production.

The company's news release is here.

-- Jim Fuquay

 

Chesapeake offering buyouts to 275 employees

Oklahoma City-based  Chesapeake Energy this morning said it "has offered a voluntary separation program to certain Chesapeake employees as part of the company's ongoing efforts to improve efficiencies and reduce costs." Julie Wilson, Chesapeake's chief officer in the Barnett Shale, said the buyouts dod not affect the company's area operations, which employ about 500.

Chesapeake said eligibility of about 275 workers is based on "a combination of age and years of Chesapeake service." Terms apparently are pretty good: StateImpact Oklahoma, citing an email attributed to Chesapeake senior vice president of land Henry Hood, said the buyouts offers a year's pay, a year's health benefits payments and "various stock benefits." Those generous terms and the limited nature of the buyouts -- the company has more than 13,000 employees, including more than 4,000 at the Oklahoma City headquarters campus, StateImpact said -- the buyouts likely are aimed at higher-ranking executives.

The company's official announcement said eligible employees have 45 days to take the offer. Separations are effective in February, but the company said it could delay departures if needed for business needs. "This program is designed to give our longer-term employees the chance to benefit from their years of service to Chesapeake while furthering our efforts to maximize corporate performance and maintain our leadership role in this competitive and constantly evolving industry," Martha Burger, senor vice president of human and corporate resources, said in the release.

-- Jim Fuquay