Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Chesapeake Chucks More Production

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Chesapeake Energy (NYSE: CHK  ) may have learned to love low gas prices, but that doesn't mean the firm's eager to pump out every last sub-economic molecule. With about 80% of production hedged at much higher prices, roughly 20% is still exposed to spot prices -- and they ain't pretty. Thus it's no great surprise that the company today announced it has curtailed about 7% of gross operated production.

We're way past cautionary cuts at this point, but Chesapeake is definitely doing the right thing by further reining in production.

Natural gas is priced at roughly $4 at Henry Hub (the Louisiana location that sets the national reference point), which sounds bad enough, but that benchmark masks some brutal regional differentials. The region including Chesapeake's own backyard of Oklahoma is one example, with CEO Aubrey McClendon pointing to March wellhead prices of $2.70.

Rockies gas may be even worse off, but that's an area Chesapeake has deliberately avoided, and a problem left to folks like Anadarko Petroleum (NYSE: APC  ) and BP (NYSE: BP  ) . Appalachian gas, meanwhile, continues to sell at a premium, on account of its proximity to the Northeast. Chesapeake and other Marcellus marauders like Atlas Energy Resources (NYSE: ATN  ) can only take so much solace there, with $4.40 gas not being anything to write home about.

Perhaps more interesting was Chesapeake's second announcement today. Haynesville Shale partner Plains Exploration & Production (NYSE: PXP  ) has requested a modification to the joint venture agreement hammered out back in July. Plains now has the option to bail on the second half of its $1.65 billion drilling carry (the part of the tab that Plains is picking up on Chesapeake's behalf). The cost of exercising the option? A return of 50% of Plains' interest in the multibillion-dollar development.

However, I don't see the introduction of this option as a point of real concern for Chesapeake investors.

It is hard to see Plains abandoning this enviable leasehold position short of some extraordinary financial distress. But anything is possible, and we've already seen one of Chesapeake's partners take a painful exit. Plains should have more liquidity levers to pull than that smaller outfit, however.

In a worst-case scenario, I would imagine that Chesapeake would be able to persuade an even better-funded international oil major like Total SA (NYSE: TOT  ) to step in and pick up a piece of the Haynesville. 

Related Foolishness:

Chesapeake is a Motley Fool Inside Value selection. Atlas Energy and Total are Income Investor recommendations. See if any of our Foolish newsletters spin your drill bit with a free 30-day trial.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 842419, ~/Articles/ArticleHandler.aspx, 10/22/2016 7:47:28 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 22 hours ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
CHK $6.68 Down -0.23 -3.33%
Chesapeake Energy CAPS Rating: ***
APC $63.54 Down -0.22 -0.35%
Anadarko Petroleum CAPS Rating: ****
ATN.DL2 $30.19 Down +0.00 +0.00%
Atlas Energy Resou… CAPS Rating: *****
BP $36.25 Up +0.20 +0.55%
BP CAPS Rating: ****
PXP.DL2 $0.00 Down +0.00 +0.00%
Plains Exploration… CAPS Rating: ***
TOT $48.28 Down -0.26 -0.54%
Total CAPS Rating: ****