Chesapeake Energy shifting from aggression to financial discipline

After years of building a reputation as one of the most aggressive U.S. natural gas giants, Chesapeake Energy is slowing down.

The new leadership of the Oklahoma oil and gas company is bent on reining in spending and shaving costs. Chesapeake’s new CEO Doug Lawler, speaking in New York this week, described a material shift in the company’s operational strategy.

“Opportunities that we have going forward are based on how we drive the greatest value for our shareholders, not how we can expand or grow our land position,” Lawler, who was tapped by Chesapeake in May, said Wednesday during an investor conference hosted by Barclays. “We’re going to be return-centric in everything that we do in all aspects of our business.”

Chesapeake’s announced shift comes months after the company’s former chief executive, the embattled Aubrey McClendon, left the company, after the loss of his role as chairman and amid scrutiny for  perks and dealings that drew investigations from federal regulators.

McClendon came under shareholder pressure in 2012 when the company saw a sharp decline in cash flow and escalating debt, which peaked at $16 billion. Investors erased $8 billion from the company’s market value at one point last year.

Chesapeake’s recently tapped management chief this week drew a line in the sand.

The first rule at the new Chesapeake: financial discipline. The goal: balancing the company’s capital expenditures profile with its operational cash flow. Under the new capital allocation plan, the company will focus on the highest-quality projects – those with the best returns – and divest non-essential assets, Lawler said.

“As we find new plays with the expertise that resides in our geosciences group and our land group, and the speed at which they can move, it’ll have to compete with the quality of the assets that we presently have,” he said during the conference on Sept. 10. “It’s not an addition game where we just continue to add capital to our program. It’s an efficiency game.”

In July, the company sold off $1 billion in Eagle Ford and Haynesville shale assets. And this week, CNBC reported the company has begun laying off employees, a cost cutter the company may employ again before the end of the year.

“Chesapeake is transitioning key leadership positions and making adjustments to its organization to properly align resources, reduce expenses, and improve its operating and competitive performance,” said Gordon Pennoyer, a spokesman for Chesapeake, in a written statement.

The company’s stock has climbed 35 percent over the past year, closing Thursday at $26.92 per share.

The company dropped its total capital expenditures 46 percent to $7.2 billion in 2013, compared to about $13.5 billion in the previous three years. And Chesapeake is changing its spending habits – 81 percent of the company’s expenditures will go to drilling and completion, compared to an average of 50 percent from 2010 to 2012, according to Chesapeake’s presentation at the Barclays conference.

“The company’s in repair mode right now,” said Mike Kelly, an analyst at Global Hunter Securities.

Kelly said McClendon, a successful land man who put together large swaths of acreage in the hottest shale plays across the country, for years looked like a genius as the company outspent its cash flow. That was, until gas prices fell and the company “came apart at the seams,” saddling Chesapeake will heavy debt burdens as cash flow took a hit.

The company began shifting its asset mix to oil, Kelly said. Chesapeake estimates its oil production will grow to 39 million barrels in 2013, up 25 percent from the previous year.

The company’s shift toward oil and natural gas liquids should drive the company’s cash flow higher, said David Heikkinen, founder and CEO of Houston-based Heikkinen Energy Advisors.

“The next step for the company will be relatively slow growth compared to its peers,” Heikkinen said.