Chesapeake Energy Corp. yesterday revealed a plan to cut $1 million of costs from each new well, as first-year CEO Doug Lawler continues his reshaping of the country’s second-largest gas producer.
On an earnings call yesterday, Lawler and other executives skipped over specifics but said the company will offer more details at an analyst meeting next week.
Regardless, it suggests that Lawler wants to exploit an industry trend — of ever-cheaper and ever-more-productive shale wells — to return Chesapeake to the industry’s leader board.
“That was a program that we were looking to achieve and accomplish over the course of 2014. We essentially have captured a good amount of that, if not all of it, in several areas,” Lawler said on the call. “We still have more opportunities through efficiency and synergies that we anticipate we can capture.”
The moves will be central to Lawler’s target, which is to raise overall production with a vastly smaller capital budget. He’s set a $5.4 billion budget for 2014 — compared to $6.7 billion in 2013 and more than $13 billion in the prior years — but wants Chesapeake’s production to rise 8 to 12 percent this year, largely on natural gas liquids.
The mood of the quarterly conference call was less glum than some in Chesapeake’s recent past. It’s now been two years since the company spun out under founder, former Chairman and CEO Aubrey McClendon, one of the shale revolution’s celebrities.
In early 2012, crashing natural gas prices revealed Chesapeake to be overextended in shale plays and overburdened by debt. McClendon’s strategy was scrutinized by top shareholders, which eventually led to his departure last May.
Lawler, a 46-year-old executive plucked from the rising ranks at Anadarko Petroleum Corp., was hired in June — and he brought a different calling card.
McClendon was known for vigor, grand vision and hyper-optimism about the industry — and an insatiable appetite for new shale buys. Lawler, meanwhile, had cut his teeth keeping operations tight at one of the most disciplined companies in the industry.
By training, McClendon is a landman — someone whose job is to buy acreage. Lawler is a petroleum engineer.
While Lawler has worked in U.S. onshore, his most recent post at Anadarko was in offshore drilling. In Mozambique, he supervised the effort to turn a huge gas find into exportable gas — the kind of megaproject whose cost can get out of hand quickly.
“He’s a pencil guy. And a pencil guy’s going to manage every dollar. And they need that” at Chesapeake, said Chris Faulkner, CEO of Dallas-based Breitling Energy.
“This guy gives you the idea that he’s going to be a pencil guy who’s going to manage the company’s direction and focus, and then he’s going to plan, he’s going to negotiate, he’s going to organize the development plans of all of their assets,” he said. “And that is the exact opposite of Aubrey McClendon. And there’s nothing wrong with that.”
Chesapeake’s stock closed at $29.65 per share yesterday, its highest level since falling below $17 in May 2012.
Chesapeake will have to catch up to an industry that has grown leaner. In the two years that Chesapeake has staggered off the mat, a new model of Energy Company has held up the prize belt.
The successes of companies like Continental Resources Inc. and EOG Resources Inc. have captivated Wall Street with the idea that “small is beautiful.” The best in shale, so it’s thought, focus on a couple of plays, preferably oil-rich, with an eye to pulling the greatest amount possible out of shale rock.
Lawler, working with a much larger company, has offered a different vision: that he can exploit the best parts of the house that Aubrey built.
If competitors focus on one or two key shale basins, Chesapeake will focus on four or five, he said at a Credit Suisse conference in February. But these plays won’t be drilled for their own sake, he said — they’ll be maximized.
“You might have noted and have heard me say in the past that the efficiency curve has been climbed by our competition,” he said, according to a transcript. “And that entire efficiency curve is yet before Chesapeake in a world-class inventory of assets.”
As it seeks to snip $1 million from every new well, the company argues, it will have the benefit of seeing what has worked in the field. Pad drilling — splintering off several horizontal wells into a given area — will be one key strategy, as it gets more of the available fuel.
As for other options, Chesapeake will reveal more, on a play-by-play basis, next week. But the list of techniques isn’t a mystery. By now, longer laterals, tighter laterals, more fracturing stages and tinkering with proppant have become standard industry practice; the only question is how they’re uniquely applied by each company or play.
One other possibility is using the company’s size to its benefit. Executives indicated that they want to use Chesapeake’s scale as a buyer to reduce costs in the supply chain — roughly analogous, perhaps, to how Wal-Mart Stores Inc. gets bulk rates on items like T-shirts.
Transforming the workforce
One item that appears to be complete is layoffs. Chesapeake swelled to 13,000 employees under McClendon, and Lawler laid off about 800 last fall.
The pink slips included landmen, information technology workers and human resources workers, among others. But according to a Reuters story, others to lose their jobs included company chaplains, gardeners, fitness staff and a weatherman.
In a letter to employees, Lawler said “the initial transformation work is finished.”
That layoff alone has added 3 cents to every share, Tim Rezvan, an analyst with Sterne Agee, wrote.
The other area to transform: the balance sheet. Lawler faces long-term debt of $12.6 billion, along with the interest bill that requires. Analysts have implored Chesapeake to cut its capital budget to a level that matches the money it makes to avoid making the problem worse.
Finally, Lawler will aim to purge the pile of deals that McClendon struck to fund his budgets. These deals are confusing Chesapeake’s value on the market, Lawler says. One of them, an unusual perk that gives McClendon a partial ownership in Chesapeake wells — and whose revelation sped his exit — survives until June.
Speaking to analysts yesterday, Lawler did hint that after slimming the company down, he might look to leave his own mark on the firm — perhaps by taking it global.
“As the world, and countries around the world, look for opportunities to develop their own unconventional or shale resources, Chesapeake has that expertise and could potentially be a part of it,” he said. “We just have to be very careful that we do not compromise the value creation story from our current assets.”
Written By: Saqib Rahim, E&E reporter
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