Chesapeake 2Q income up; will reduce Fayetteville Shale drilling

Fayetteville Shale operator Chesapeake Energy Corp. did not gain any ground in the second quarter, posting earnings on Tuesday that fell just short of last year’s results. The Oklahoma City oil and gas driller also disclosed a new corporate strategy that will result in less drilling in Arkansas’ Fayetteville Shale play.

For the period ended June 30, 2010, Chesapeake posted net income of $235 million, or 37 cents a share, compared to earnings of $237 million, or 39 cents a share, in the same period of 2009.

Overall, the company reported revenue of $2.01 billion, up 20% from $1.67 billion in the year-ago period. Excluding special items, Chesapeake reported net income of $491 million, or 75 cents per share, easily beating Wall Street’s second quarter predictions of 67 cents per share.

Company officials did not comment on the second quarter results, but executives with the Oklahoma City-based oil and gas giant are scheduled to hold a conference call with analysts at 9 a.m. today (Aug. 4) to discuss the company’s financial and operational results.

Operationally, Chesapeake said in its second quarter financial statement that it has accelerated its transition to a more liquids-rich asset base. This planned transition will result in a more balanced portfolio between natural gas and liquids and by year-end 2015, the company contends.

"The company has redirected a significant portion of its technological, geoscientific, leasehold acquisition and drilling expertise to identifying, securing and commercializing unconventional liquids-rich plays," the company said in its second quarter financial statement. "Chesapeake’s goal is to reach a balanced mix of natural gas and liquids revenue as quickly as possible through organic drilling, rather than through acquisitions, at very low per net acre leasehold acquisition costs and low drilling and completion costs."

On Monday, ahead of its earnings report, Chesapeake said it expected natural gas production to rise 13% this year, up from its May forecast that production would rise between 8% and 10%. The driller said its average daily production for the second quarter was 2.79 billion cubic feet of natural gas equivalent, an increase of 14% from the same period last year.

Still, Chesapeake’s strategy means the company will reduce drilling of natural gas wells in most plays where the price of natural gas drops below $6 per million cubic feet (mcf), except for situations involving lease agreements and joint venture partners.

Accordingly, compared to 2010, Chesapeake is reducing its projected 2011 drilling and completion capital spending on natural gas plays by nearly $400 million and redirecting that investment into its liquids-rich strategy. Chesapeake is also projecting 2011 drilling and completion capital spending will stay the same as last year’s budget in the range of $4.5 billion – $4.6 billion.

In the Fayetteville Shale, where Chesapeake is the second-largest leasehold owner and producer behind Southwestern Energy, the company estimates it has approximately 2.4 trillion cubit feet equivalent (tcfe) of proved and 7.7 tcfe of risked unproved resources.

As a result of stronger daily net production at each well, Chesapeake said it is reducing its drilling activity in the Arkansas shale play. The company is drilling with eight operated rigs in the Fayetteville Shale and anticipates operating an average of nearly 10 rigs in 2010 to drill approximately 85 wells.

Chesapeake lowered its drilling activity from an average of 18 operated rigs in 2009 to eight operated rigs currently, and an average of eight operated rigs projected for 2011 and beyond.

Chesapeake shares (NYSE: CHK) closed Tuesday at $21.83, up 18 cents. During the past 52 weeks the share price has ranged from a $30 high to a $19.62 low.