Chesapeake Energy Corporation (Chesapeake Energy) has chosen to limit about 400 million cubic feet (mmcf) per day of its gross natural gas production because of constant low wellhead prices. The cutback comprises of 200 mmcf per day restriction of natural gas production earlier declared on March 2, 2009. The company has restarted 7,000 barrels per day of oil production from earlier curtailed oil wells.
Chesapeake Energy’s 400 mmcf per day curtailment represents about 13% of its existing gross operated natural gas production capacity. The wells that have been restrained are mainly situated in the mid-continent and Barnett shale regions. Until natural gas prices strengthen, Chesapeake Energy intends to limit production from most recently concluded wells in the Barnett and Fayetteville shales to 2 mmcf per day and in the Marcellus and Haynesville shales to five and 10 mmcf per day, correspondingly, in addition to the estimated 400 mmcf per day curtailment.
Chesapeake Energy has made this decision because of its strong financial condition and wide range of natural gas hedging positions. Additionally, because of the steeply declining production profile of new natural gas wells and the upward trending slope of the NYMEX natural gas futures curve, the company considers deferring production and revenue to future periods with higher natural gas prices creates greater shareholder value than selling production into the existing unusually low priced natural gas market.
Management Comments
Aubrey K. McClendon, Chesapeake Energy’s chief executive officer, commented, “As a result of recession-related reduced demand and abundant US production, natural gas prices have remained soft in recent months. However, we believe substantially lower drilling activity and natural reservoir depletion will work to rebalance U.S. natural gas markets by late 2009 or in early 2010. This recovery is already partially reflected in the NYMEX natural gas forward strip, but we believe it will become much more pronounced in the months to come as U.S. natural gas production declines begin to accelerate and the economy begins to recover. Our analysis indicates that the incremental returns for deferring revenue to future periods are very attractive and may in fact become exceptional once demand recovers and the NYMEX curve increases.
“We believe that Chesapeake Energy’s strong financial condition and extensive hedges provide us with the operational and financial flexibility to make prudent natural gas revenue maximization choices. We will continue to work to protect and enhance shareholder value, particularly in the current challenging economic environment. Additionally, Chesapeake Energy and other producers remain well positioned to readily meet increased market demand for natural gas as the economy recovers and as power generation and transportation markets further expand their use of natural gas in the years to come.”