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Chesapeake shares jump on lower spending, bright Powder River Basin 2019 outlook

Chesapeake Energy Corp. found the sweet spot with investors Jan. 9 with a report that it cut spending more than expected while beating analysts' production production estimates when it pre-released its fourth-quarter 2018 operations results.

Chesapeake Energy shares gained nearly 13%, to $2.76, in heavy trading Jan. 9 after reaching as high as $2.87.

Investors ignored fourth-quarter production of roughly 463,000 barrels of oil equivalent per day, 22% less than the fourth quarter of 2017, with 15% less oil production, and focused instead on Chesapeake's plan to use cash flow from well-established gas plays in the Marcellus and Haynesville shales to finance shale oil drilling in Wyoming's Powder River Basin and south Texas' Eagle Ford Shale.

They also noted that Chesapeake was able to replace production volumes after selling its Ohio Utica Shale operations with Powder River Basin and Eagle Ford production and using the $1.9 billion sale proceeds to pay down debt.

"We think the key for Chesapeake remains driving leverage lower, which the company did a good job of last year," energy analyst Neal Dingmann of SunTrust Robinson Humphrey said in a Jan. 9 note to clients. "We view today’s update positive for Chesapeake and also potentially for other operators with PRB exposure such as [Anadarko Petroleum Corp.], [EOG Resources Inc.] and [Devon Energy Corp.]."

The company said oil volume growth in the Powder River Basin and Eagle Ford replaced volumes from the Utica in the two months after the sale, which closed in October 2018. The sale is part of Chesapeake's strategy to move away from gas and grow its oil production.

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Chesapeake achieved a net production exit rate of about 38,500 boe/d, composed of 47% oil and 60% liquids, in the Powder River Basin in December. Annual production from the basin is expected to more than double during 2019 compared to the previous year, with Chesapeake operating five rigs in the area.

Operations in the Eagle Ford are expected to average about 105,000 boe/d, 58% of which is oil, in the fourth quarter. Chesapeake is operating four rigs in the basin.

Chesapeake also said it is continuing its focus on debt reduction and achieving cash flow neutrality in 2019. During the year, Chesapeake plans to cut capital expenditures by reducing its rig count by 20% to an average of 14 rigs.

The Utica sale, along with debt refinancing, helped Chesapeake wipe out about $2.6 billion in secured leverage. Asset divestitures in 2018 earned the company over $2 billion in net proceeds, which was used to reduce total debt by about $1.8 billion from year-end 2017.

The fourth-quarter operations update was not all about the reformed wildcatter eating its vegetables and paying the bills. Chesapeake reported drilling two record-breaking wells in the dry gas Marcellus Shale in northeast Pennsylvania during the quarter without using the "Rambo frack" that created its previous record-setting well in nearby Wyoming County.

The JOEGUSWA 4H and 5H wells reported initial production volumes of 62.6 MMcf/d and 73.4 MMcf/d, respectively, well in excess of Chesapeake's record-setting 61.8-MMcf/d McGavin WYO 6H well of August 2017. Illustrating the steep decline curves of shale gas wells, the McGavin 6H produced 4.2 MMcf/d in October, the latest month state data is available. Both wells used 1,600 pounds per lateral foot of proppant, compared to about 3,000 pounds in the "Rambo frack," Chesapeake said.