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.