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Chesapeake's $2B pivot from Utica Shale reinforces company's new direction

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Chesapeake's $2B pivot from Utica Shale reinforces company's new direction

Years ago, the Utica Shale was big-spending Aubrey McClendon's last big bet as CEO of Chesapeake Energy Corp. Now the increasingly frugal company has announced plans to sell out of the play as part of $2 billion agreement with a Houston startup.

Chesapeake reached an agreement with Encino Acquisition Partners LLC to sell its assets in the Utica, with the deal closing in the fourth quarter. Approximately $1.9 billion of the sale price, the company said, will go to paring down debt.

The move met with a favorable reaction from both investors and analysts, who supported the company's continuing shift to oil-heavy plays while focusing on debt reduction. "Looking ahead, we're watching for capital allocation in 2019 as >$400MM of Utica capex rolls off and opens the door for a ramp in the liquids-rich [Powder River Basin]," Tudor Pickering Holt & Co. said in a July 27 note.

The company operates 920 wells on 320,000 developed acres in Ohio's Utica play, with production of 107,000 boe/d, of which 67% is gas. Chesapeake said it spent $471 million in capital costs in the Utica in 2017.

In what may be an indication that the Utica has not developed into the force McClendon once anticipated it would be, to the point where he and the company he once ran went to court over whether he used proprietary information to buy back into the play after his 2013 ouster as CEO, analysts said Chesapeake's return appeared to be just for the operating wells and not for undeveloped acreage.

"Our preliminary math suggests that the Utica asset was sold for roughly our estimated value of the producing assets under NYMEX strip pricing, implying little value for undeveloped upside," Raymond James Financial Inc. analyst John Freeman said in his take on the sale. Encino said the deal involved more than 900,000 acres in total.

"By divesting our position in the Utica and using the proceeds for debt reduction, we will not only significantly improve the health of our balance sheet, but we will also accelerate progress toward our strategic goals of reducing our debt, improving our margins and reaching sustainable free cash flow neutrality," CEO Doug Lawler said in a statement.

Chesapeake also said the Powder River Basin was emerging as the "oil growth engine" of the company, with production up 78% since the fourth quarter of 2017 and a new production record of 32,000 boe/d set on July 22.

Chesapeake shares jumped up as much as 8% in morning trading before settling down to a 1% increase, to $4.44, in midafternoon trading July 27.