Why Chesapeake expects to spend less on drilling oil wells

Market Realist

Why Chesapeake reported a solid 3Q13 but dropped almost 8% (Part 4 of 6)

(Continued from Part 3)

Chesapeake says it will spend less on drilling wells in 2013 but it will produce the same amount of oil and gas

Chesapeake Energy on its 3Q13 update effectively increased revenue guidance (please see the prior part in this series). Plus, the company lowered its capital expenditure guidance without lowering the amount it expects to produce. Chesapeake’s original guidance for the amount it expected to spend on drilling and completion costs (in layperson’s terms, the amount it planned to spend on drilling wells) was $5.7 billion to $6.0 billion. Its new guidance is now $5.5 billion to $5.8 billion. Meanwhile, Chesapeake didn’t reduce the amount it planned to produce during the year.

Savings on capital expenditures comes from operational efficiencies

Management commented on its reduction in capex spending:

  • “Our focus on financial discipline and operational efficiencies generated lower-than-expected capital expenditures during the 2013 third quarter (discussed in prior section), and we have reduced our full-year 2013 capital spending outlook accordingly. I am particularly impressed by the strong performance of the company while we implemented significant transformational initiatives over the past few months. We look forward to achieving further efficiency gains and improvements in returns on capital in 2014.”

Chesapeake stated that it will provide guidance for 2014 early next year but noted that it planned to continue to grow organic production (production normalized for asset sales and acquisitions) and that it plans to do so with less capex than in 2013.

A switch to multi-well pads will help

Management noted that, ideally, it would like for all new wells to be using multi-well pads instead of single-well pads, and it’s targeting 100%. In the past few years, roughly 75% of wells have been on single-well pads, but the company expects in 2014 that the proportion of multi-well pads will approach 75% (25% single-well pads).

Continue to Part 5

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