Chesapeake Drops as Gas-Field Sales Crimp Production

Chesapeake Energy Corp. (CHK), the U.S. natural gas explorer that was on the verge of running out of cash two years ago, said output will grow by the slimmest margin in 14 years as the company sheds its weakest-performing assets.

Chesapeake cut its output growth estimate for this year to 2.2 percent in a statement today, compared with a 4.3 percent target announced earlier this month. The fall-off stemmed from wells the Oklahoma City-based company is selling from Pennsylvania to Wyoming as part of $4 billion in divestitures by Chief Executive Officer Doug Lawler.

Chesapeake tumbled 4.7 percent to $27.64 at the close in New York, the biggest decline since Feb. 26. Chesapeake was the worst-performing energy stock in the Standard & Poor’s 500 Index today.

Lawler, who replaced Chesapeake founder Aubrey McClendon 11 months ago after an investor revolt, has been shrinking Chesapeake’s portfolio and simplifying the balance sheet to boost profits and the stock price.

Chesapeake said full-year production will be equivalent to 675,000 to 695,000 a day on average, compared with the 690,000 to 710,000 estimate announced May 7. The mid-points of those ranges are 685,000 and 700,000, respectively. In 2013, output averaged 669,600 barrels a day.

Worst Performance

A 2.2 percent production increase for Chesapeake would be the worst performance since 2000, when output declined by 8.5 percent, according to data compiled by Bloomberg.

In a stark contrast to his predecessor’s focus on domestic U.S. exploration, Lawler said last month that he envisions an overseas expansion to take advantage of Chesapeake’s shale-drilling expertise.

The company has been evaluating oil and gas formations from New Zealand to Central Asia and Scandinavia to Argentina, according to a presentation prepared for an analysts’ event in Oklahoma City today.

“You cannot think of shale development anywhere in the world without thinking of Chesapeake,” Lawler said during the presentation.

Chesapeake also said today that it plans to shrink its workforce by half to the smallest since 2006 in a rig spinoff by the end of next month.

Reduce Leverage

The spinoff of the oilfield-services division to shareholders in a tax-free maneuver is part of a series of transactions that will enable Chesapeake to spend less than it takes in for the first time in more than a decade. The spinoff will result in a $400 million cash infusion to Chesapeake in the form of a dividend, while also lowering leverage and reducing interest expenses and project costs.

The spinoff of the oilfield-services unit, which will be renamed Seventy Seven Energy Inc., was first mooted in February. The business employs 5,200 of Chesapeake’s 10,800 employees and owns 114 rigs. It also carries about $2 billion in debt.

Other fundraising transactions announced today include the sale of a stake in Chesapeake Cleveland Tonkawa LLC to the preferred holders; and sales of wells in Oklahoma, Texas, Pennsylvania and Wyoming. Combined, the deals announced are expected to shave 2 percent off 2014 oil and gas production and curb operating cash flow by $250 million, Lawler said in the release.

The fundraising announcement prompted Standard & Poor’s to raise its rating on Chesapeake debt two levels to BB+, one level below investment grade. S&P analyst Scott Sprinzen cited Chesapeake’s improving leverage position for the upgrade and said more may follow if the company increases cash flow from its wells.

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net Stephen Cunningham, Alex Devine

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