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Chesapeake sees threat from LNG imports Natural gas producer to pay down debt with $1 billion in excess cash Petroleum News Houston Staff
At least one U.S. natural gas producer is taking steps to protect itself against what it perceives to be a future threat from liquefied natural gas imports.
Chesapeake Energy said July 29 that it would strengthen its balance sheet against “the onslaught” of LNG during the second half of the decade by reducing debt through $1 billion in excess cash it hopes to earn over the next five years.
LNG currently supplies 1 percent of the United States’ natural gas needs. Some experts say the commodity could meet as much as 20 percent of the country’s demand by 2020, although others, such as Geraldo Riviera with ConocoPhillips’ LNG group and Daniel Yergin, chairman of Cambridge Energy Resources Associates, contend LNG should not be viewed as a panacea for the nation’s growing gas shortage, noting it faces significant local, state and federal regulatory challenges.
Nonetheless, Chesapeake views LNG as a threat and plans to reduce its debt-to-capitalization ratio of 58 percent to 50 percent by the end of 2004: “We want to use this period of elevated (gas) prices to protect ourselves,” said Aubrey McClendon, Chesapeake's chief executive. “We expect to generate a large amount of cash (and) this excess could be $1 billion over the next five years.”
Chesapeake also has taken out strong price hedges on future production through 2007. The company has hedged 62 percent of its 2003 third-quarter production at $5.50 per million cubic feet and 63 percent of its fourth-quarter production at $5.72 per million cubic feet.
Oklahoma-based Chesapeake, primarily a Midcontinent producer, has undergone phenomenal growth over the past few years to become the sixth largest independent natural gas producer in the country. Over the last eight quarters alone, Chesapeake's production has increased 72 percent. Aubrey: growth is organic For the 2003 second quarter alone, Chesapeake produced 67.3 billion cubic feet of gas equivalent, up nearly 19 percent from the first quarter's 56.8 bcf and up an astounding 55 percent from the 43.4 bcf Chesapeake produced during the same quarter last year. The company projected that total 2003 production of 255 to 260 bcf of equivalent would grow to 275 to 280 bcf by the end of 2004.
The company has grown through both acquisitions and drilling successes. But in a conference call on 2003 second-quarter earnings, Aubrey said Chesapeake's aggressive acquisition strategy was “obscuring one of the best organic growth stories in industry.” He noted that of the 10.5 bcf of production increase that came between the 2003 first and second quarters, only 9.5 percent came from acquisitions closed in the second quarter. He said the company has “no present or pending” deals.
In the 2003 second quarter, Chesapeake posted net income of $76.3 million or 31 cents per share, compared to a profit of $22.5 million or 13 cents per share in the year-ago quarter. Operating income was $169.6 million compared to $62.7 million a year earlier.
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