Though natural gas still comprises three-quarters of Chesapeake Energy's (NYSE:CHK) total production, the company has made impressive strides in boosting oil production.
Because of severely depressed natural gas prices over the past few years, the Oklahoma City-based company embarked on a strategy to diversify its commodity mix away from the out-of-favor commodity and toward more profitable opportunities, such as oil and gas liquids.
Highlights from Chesapeake's first quarter show that this shift in strategy will continue for the foreseeable future, or at least until gas prices recover to a level where the company's gassy assets start generating rates of return that are competitive with its oilier assets. Let's take a closer look.
Oil production growth
Chesapeake's first-quarter oil production came in at 103,000 barrels per day, up 6% sequentially and 56% year over year, while natural gas liquids production was roughly 54,300 barrels per day, representing an 8% sequential increase and a 14% year-over-year improvement.
Oil output growth was driven mainly by strong performance from the company's Eagle Ford and Greater Anadarko Basin operations. Chesapeake continues to see major efficiency gains in these plays, which have led to meaningfully lower well costs and a decline in the number of drilling days. In the Eagle Ford, for instance, the company reported a 28% year-over-year decrease is spud-to-spud cycle times, which fell from 25 days to just 18 days in the first quarter.
Eagle Ford and Greater Anadarko Basin progress
Daily net production in the Eagle Ford came in at 75,000 barrels of oil equivalent in the first quarter, representing a 225% year-over-year increase, of which 62,000 barrels of oil equivalent was liquids. The company drilled 91 new wells in the play during the first quarter and is targeting a year-end exit rate of 92, 000 barrels of oil equivalent per day. It is currently operating 15 rigs in the play, with plans to reduce its rig count to 13 in the second half of the year.
In the Greater Anadarko Basin, Chesapeake is focused on five core plays, which include the Mississippi Lime, Granite Wash, Cleveland, Tonkawa and Hogshooter. In the first quarter, aggregate net production from the five plays came in at 114,000 barrels of oil equivalent per day, up 30% year over year and up 9% sequentially. Chesapeake is currently running 28 operated rigs in the five plays.
Encouraged by strong oil production results from these two plays, the company raised its overall oil production guidance for the year by 1 million barrels to a range of 37 million to 39 million barrels. Liquids now account for about 24% of Chesapeake's total production, up significantly from 19% a year ago.
For the remainder of the year, Chesapeake plans to allocate roughly 85% of its drilling completion capital to liquids plays -- mainly the Eagle Ford and the Greater Anadarko Basin -- despite the recent surge in natural gas prices and the generally bullish outlook for prices over the remainder of the year.
Going forward, it will be interesting to see how Chesapeake balances its asset sales strategy with its pledge to ramp up production. To combat its cash flow shortfall for 2013, which the company estimates at $3.5 billion, it plans to raise between $4 billion and $7 billion in asset sale proceeds this year.