Chesapeake Cuts Natural-Gas Output as Prices Hit 10-Year Low

Chesapeake Energy Corp. (CHK), the second- largest U.S. natural-gas producer, will cut output, idle drilling rigs and reduce spending in gas fields by 70 percent after prices for the fuel hit a 10-year low.

Gross production at wells it operates will drop by as much as 1 billion cubic feet a day and the Oklahoma City-based company will defer gas-well completions wherever possible, according to a statement today. Chesapeake, which accounts for about 9 percent of U.S. gas output, will cut spending on gas wells to $900 million this year from $3.1 billion in 2011.

Natural gas for February delivery rose 7.8 percent, the most since Dec. 10, 2009, to settle at $2.525 per million British thermal units on the New York Mercantile Exchange after the announcement. They had fallen by half in the past year and declined the most among the Standard & Poor’s GSCI Spot Index (SPGSCI) of raw materials.

“Chesapeake is a big player,” Scott Hanold, a Minneapolis-based analyst for RBC Capital Markets who rates Chesapeake at “sector-perform” and owns no shares, said today in a telephone interview. “It’s going to be a collective effort by the industry to right the market and you’ll see more announcements this quarter.”

Chesapeake shares rose 6.3 percent to close at $22.28 in New York. Also today, the U.S. Energy Department cut its estimate of gas in the Marcellus shale formation by 66 percent, to 482 million cubic feet, citing improved data from drilling and production.

Idling Rigs

Gas sold from U.S. output in 2011 rose by about 4.5 billion cubic feet a day, or 7.4 percent, the largest annual gain in history, according to the Energy Information Administration. U.S. production and reserves have been driven by the increased use of hydraulic fracturing, the practice of injecting water, sand and chemicals underground to release gas from shale-rock formations.

Chesapeake said it will “immediately curtail” output of 500 million cubic feet a day, 8 percent of production, and will idle half its drilling rigs by the second quarter in fields that produce only gas, including the Barnett Shale of Texas, the Marcellus Shale and the Haynesville Shale.

Spending on undeveloped leases will fall to $1.4 billion in 2012 from $3.4 billion in 2011 and will be limited to areas where the company already is active, Chesapeake said.

Chesapeake’s output curtailment follows EQT Corp. (EQT)’s Jan. 20 announcement that it will suspend drilling in its Huron Field in Kentucky. Southwestern Energy Co. (SWN) Chief Executive Officer Steven Mueller said in a Jan. 5 interview his company may slow production in Arkansas’s Fayetteville Shale if prices stay low.

Exxon Mobil Corp. is the largest U.S. gas producer.

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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