Chesapeake Energy Corporation announces an enhanced financial plan for 2008-2009 and its initial production and budget forecasts for 2009. Key elements of the financial plan include taking advantage of the favorable master limited partnership (MLP) and financial markets that exist for low decline-rate producing natural gas assets and for midstream gas assets in order to capture latent balance sheet value and to fully fund its planned capital expenditures.
During the next four months, the company anticipates completing its first two transactions associated with the new plan. For the first transaction, Chesapeake has retained Jefferies Randall & Dewey to assist in selling a non-operated minority interest in certain Chesapeake-operated producing assets in Kentucky and West Virginia representing approximately 145 bcfe of proved reserves and 30 mmcfe net per day of production, or approximately 1.5% of the company's current proved reserves and net production. Chesapeake believes these assets will be attractive to both the MLP and financial markets due to the low-risk, long reserve-life and low decline-rate profiles of the properties. The company intends to retain drilling rights on the properties below currently producing intervals and outside of existing producing wellbores. Chesapeake expects to receive proceeds of approximately $550 million from the Appalachian asset sale, which is anticipated to close by year-end 2007. Additionally, Chesapeake plans to pursue the sale of four similar packages of mature properties approximately every six months in 2008 and 2009 for further proceeds of approximately $2 billion.
For the second transaction, Chesapeake has retained UBS Investment Bank to assist in forming a private MLP or an alternative financial structure to own a non-operating majority interest in its midstream natural gas assets, which consist primarily of gas gathering systems and processing assets. These assets, which are expected to grow substantially in future years, currently generate annualized cash flow from operating activities of approximately $100 million. The company believes this transaction will be valued in excess of $1 billion.
As a result of these planned transactions during the next nine quarters, Chesapeake believes the MLP and financial markets will allow it to monetize approximately $3.5 billion of assets that, in management's opinion, are not adequately reflected in Chesapeake's current market valuation.
Chesapeake Elects to Curtail Production and Defer Drilling Activity in Response to Lower Natural Gas Prices; However, Reaffirms Previous Production Growth Forecasts for 2007 and 2008 and Projects Further Production Growth in 2009
In response to currently low natural gas prices, Chesapeake has elected to temporarily reduce its gross daily natural gas production by approximately 200 million cubic feet (mmcf) through a combination of production curtailments and deferred pipeline hook-ups. This production reduction will amount to roughly 125 mmcf per day net to Chesapeake, or about 6% of the company's current net production, and will be focused in the Fort Worth Barnett Shale, South Texas, Deep Haley and the Anadarko Basin areas where many of the company's most prolific wells are located. Similar to its voluntary natural gas production curtailments in October 2006, the company plans to continue monitoring the natural gas markets and adjust production rates accordingly as market conditions dictate.
Chesapeake has also elected to reduce its operated drilling rig count from current levels of 155-160 rigs to 140-145 rigs by the end of 2007. This reduction in drilling activity will lower the company's previously budgeted capital expenditures by approximately 10% in each of 2008 and 2009, or a combined $1 billion.
However, because Chesapeake's production growth during most of 2007 has exceeded internal projections, the company expects to meet its previously released production guidance of August 2, 2007, which projected an 18-22% production increase for the full-year 2007 and a 14-18% production increase for full-year 2008, despite the asset sales, production curtailments and reduced drilling activity described above. Further, the company's initial projection for 2009 production growth is 12-16%.
The company's updated forecasts for 2007, 2008 and 2009 are attached to this release in an Outlook dated September 4, 2007, labeled as Schedule "A," which begins on page 6. This Outlook has been changed from the Outlook dated August 2, 2007, (attached as Schedule "B," which begins on page 10) to reflect various updated information.
Management Comments
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "Our announcement addresses two important topics in our industry today: low natural gas prices and attractive asset values for sellers of natural gas assets into the MLP and financial markets. First, we believe that current low natural gas prices are temporary and result from a modest oversupply of natural gas in the U.S. This oversupply has largely been caused by two consecutive mild winters in the U.S., increases in imports of liquefied natural gas resulting from an exceptionally warm European winter last season and increased production from domestic producers through higher drilling activity levels.
Chesapeake has been the leading contributor to these domestic natural gas production increases. Over the past year, the U.S. rig count has increased by approximately 70 rigs to around 1,800 rigs while Chesapeake's operated rig count has increased by approximately 50 rigs, representing about 70% of the nation's overall increase in drilling activity. As a consequence of Chesapeake's drilling success, the company's gross natural gas production has grown by approximately 550 mmcf per day during the past year, accounting for approximately 50% of the total increase in U.S. natural gas production while using only about 9% of the nation's rigs.
To protect the company's long-term shareholder value, we believe Chesapeake needs to respond to the current oversupply of natural gas and defer natural gas production and drilling activity until natural gas supply and demand come into better balance. We will continue monitoring the natural gas markets and adjust our production volumes and drilling activity as market conditions dictate.
We would also like to highlight Chesapeake's proactive approach to revenue management. So far this year, we have realized approximately $630 million in gains from our natural gas hedges and, as of the middle of last week, the mark-to-market gain on our remaining 2007 through 2009 natural gas hedges was approximately $1.5 billion. We have hedged approximately 60% of our 2007 second half natural gas production through swaps at a weighted average price of $8.47 per mcf, approximately 70% of our 2008 natural gas production at an average price of $9.18 per mcf and approximately 27% of our 2009 natural gas production at an average price of $8.98 per mcf. Additionally, we have hedged approximately 12% of our 2007 second half natural gas production through collars at a weighted average floor of $6.94 per mcf, approximately 4% of our 2008 natural gas production at a weighted average floor of $7.41 per mcf and approximately 2% of our 2009 natural gas production at a weighted average floor of $7.50 per mcf. The swap amounts above include certain knockout swaps that may or may not be effective hedges at contract settlement dates depending on future natural gas prices.
Secondly, we are excited to announce our enhanced financial plan for 2008-2009. This plan will enable us to realize approximately $3.5 billion in cash from the MLP and financial markets for assets that we believe are not adequately reflected in the company's current market valuation. Furthermore, we have lowered our planned total capital expenditures for 2008 and 2009 by approximately $1 billion. In combination with the $3.5 billion in planned asset monetizations, we believe that our shareholders and debtholders will be pleased that Chesapeake will be cash self-sufficient for the foreseeable future and yet can still meet its previously announced production and reserve growth forecasts. Importantly, we believe that by year-end 2009, the company's production will be nearly 40% higher than at June 30, 2007, and its proved reserves will be nearly 30% higher. We believe the market will recognize the substantial value creation potential of this enhanced financial plan."
