Chesapeake shares fall as executives tout transformation

Chesapeake Energy Corp’s stock plunged in early trading today, even as executives stressed the company’s success in cutting costs and increasing its shift from gas to oil production.

Shares in the nation’s second-largest natural gas producer after Exxon Mobil Corp fell more than 6 percent, to $18.79, early Friday on the New York Stock Exchange.

Chesapeake reported a third quarter loss Thursday of $2.1 billion, a result mostly of write downs on the value of its natural gas assets. Excluding those write downs, the company’s net income was $33 million.

Chesapeake executives said in a conference call Friday that they were making progress in transforming the company into a more profitable and balanced energy producer while also attempting to cut down its debt, which has jumped more than $5 billion over the last year.

Chesapeake has struggled over the last year as decade-low natural gas prices drained it of cash and forced it to turn to more debt and asset sales to fuel its operations. The company had previously been known as a major holder of attractive fossil fuel-producing land, but the company has now had to move away from its prior strategy of identifying and acquiring drilling leases in emerging plays, now focusing instead on what Chesapeake CEO Aubrey McClendon calls “harvest phase.”

“This strategic transformation into our asset harvest phase should lead to greater operational efficiency,” McClendon said.

Those efficiencies are already beginning to show, as the company has focused its efforts on what it sees as the most attractive land in its portfolio, trimming the amount of rigs it is using and cutting down costs and drilling times in those areas, McClendon said.

“I think what we’re seeing in the Eagle Ford, as we’re seeing across all of our plays is just quicker cycle times so we continue to drive those numbers down and get down what we want to do with fewer rigs,” he said.

Those efforts yielded results, with the company’s oil production jumping 96 percent over the last year, to 97,000 barrels a day, and cutting its production expenses per million cubic feet of natural gas equivalents by 19 percent. Although natural gas makes up 79 percent of Chesapeake’s total production, oil now accounts for 14 percent of its overall production mix.

“They’re doing I guess what the initiative was: To lower their spending basically as much as they are, but then continuing to grow production, especially the liquids production,” said Neal Dingmann, an analyst with SunTrust Robinson-Humphrey in Houston. “I think that’s the key and they basically have done that in this third quarter.”

But Chesapeake’s debt appeared to be a continued source of concern for investors.

The company reported its long-term debt at the end of the July-September quarter was $15.8 billion, a figure that Chesapeake says it plans to cut to under $9.5 billion through asset sales.

Chesapeake had set a goal this year to trim its debt to $9.5 billion, but executives said that target may slip into 2013 as some asset sales have yet to materialize.

The company announced late Thursday that it was writing down the value of its natural gas assets by $2 billion, resulting in a $2.1 billion net loss in its reported earnings.