Rapidly growing independent Chesapeake Energy, abandoning its conservative growth forecasts, has increased both production and reserve estimates through 2006, largely because of “organic growth” or gains made through drilling rather than initial property acquisitions.
The Oklahoma-based company, which over the past five years invested $4.5 billion in acquisitions and $2.6 billion in drilling, posted an enviable 33 percent increase in total 2004 third-quarter production versus the same quarter last year.
Sixty percent of the production growth in the third quarter was attributed to acquisitions and 40 percent to the drill bit, a ratio that simply does not stand up to the company’s previous forecasts of just 5 percent annual organic growth.
In fact, Chesapeake said it has delivered an average 11 percent increase in drill bit production annually over the past three years and expects no less than a 13 percent increase for full-year 2004 over 2003.
“We are now officially abandoning our long-term organic production of 5 percent,” Aubrey McClendon, Chesapeake’s chief executive officer, said in a Nov. 2 conference call with industry analysts.
He said that in addition to the 13 percent annual organic production increase expected in 2004, the company has increased anticipated annual organic growth rates in 2005 by at least 10 percent and in 2006 by at least 8 percent, for a three year average of 10 percent organic growth per year.
Gas production estimates of 350 bcf in 2004
The gas-weighted company also has increased its overall production estimates to 350 billion cubic feet of natural gas equivalent in 2004, to 407 billion cubic feet in 2005, and to 438 billion cubic feet in 2006. Over the past 13 quarters, Chesapeake’s production has increased 141 percent, McClendon noted.
“There will be very few companies that can deliver this level of production growth to investors for the next few years,” he asserted.
If Chesapeake manages to accomplish its production goals, the company would have roughly quadrupled in size over six years, certainly ranking it at or near the top of the fastest growing exploration and production independents in the United States.
Chesapeake already is the fifth largest independent producer of natural gas in the United States, owning working and royalty interests in more than 18,000 onshore producing oil and gas wells that should produce an average of nearly 1 bcf of gas equivalent per day during 2004.
Chesapeake also said its year-end proved reserves would reach 4.6 trillion cubic feet of gas equivalent in 2004, 5 tcf in 2005 and 5.4 tcf in 2006. The company said it has an additional 4 tcf of probable and possible reserves that should increase “in tandem” with its proved reserves.
“Given the stability of our producing property base and the predictable nature of our drilling results, we now feel more comfortable than ever in estimating our year-end proved reserves,” McClendon said.
Majority of reserves in U.S. Midcontinent
About 74 percent of Chesapeake’s proved reserves are in the U.S. Midcontinent, including Oklahoma, western Arkansas, southwestern Kansas and the Texas Panhandle. During the fourth quarter of 2003 and the first half of 2004, the company significantly expanded its activities in the Permian Basin of West Texas and eastern New Mexico, the South Texas and Texas Gulf Coast regions, and the Ark-La-Tex basin of eastern Texas and northern Louisiana.
On increased production and robust commodity prices, Chesapeake’s 2004 third-quarter revenues soared to nearly $630 million from $454.5 million for the year-ago quarter. Net income increased to $85.6 million from $81.9 million.
At the end of the 2004 third quarter, Chesapeake’s long-term debt was $2.76 billion, representing a hefty debt-to-total capitalization ratio of 49 percent.
