Chesapeake Mulls Joint Ventures as Bleak Outlook Slams Stock

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Chesapeake Energy Corp., the worst-performing stock on the Standard & Poor’s 500 this year, is in discussions to sell more assets or stakes in oil fields as the prospect of a prolonged energy-market slump imperils cash flow.

Chief Executive Officer Doug Lawler is leaning toward joint ventures rather than whole asset sales because they would allow Chesapeake’s engineers, geologists and physicists to take the lead in developing natural gas and oil formations they’ve been studying for years. Any proceeds would be used to accelerate drilling in the company’s most-promising fields or to pay off debt, he said in a conference call with analysts Wednesday.

The Oklahoma City-based gas explorer on Wednesday posted a second-quarter net loss of $4.1 billion, or $6.27 a share, including a $3.67 billion writedown on the value of its oil and gas assets. Shares fell 12 percent to $7.03 at the close of trading in New York.

Earlier shares were down as much as 14 percent to $6.85, the lowest intraday price since December 2002, after Lawler said he sees the rout in energy markets persisting through the end of 2016.

Lawler said he isn’t worried about low commodity prices deflating offers from potential partners. Any investors considering taking stakes in the company’s fields are focused on how much crude and gas they will yield and at how cheap a per-unit cost, he said.

“All across the industry we’re going to see more and more focus on the rock quality,” Lawler said during the call.

Lawler has been selling assets and dismantling complex financial commitments to free up cash for drilling and reduce debt since he succeeded Aubrey McClendon in June 2013.

Rising Production

Full-year gas and crude output will exceed previous forecasts by 4 percent, Lawler said.

Chesapeake pumped the equivalent of 703,000 barrels of crude a day during the quarter, surpassing every analyst estimate. The company plans to raise 2015 production without using any additional cash because its crews have knocked down the costs involved in drilling and starting production from fields in places like Ohio, the Rocky Mountains and Texas.

“The improvements in our capital efficiency over the last two years have served to increase the unrecognized value of our assets,” Lawler said in a statement. “As a result, we are reviewing opportunities in multiple operating areas to create additional value through strategic asset sales, joint venture agreements and participation, or farmout agreements.”

No VPP’s

Chesapeake isn’t interested in using a favorite financing tool of Lawler’s predecessor known as volumetric production payments, or VPPs, which tie up years of future production in exchange for an upfront loan, Chief Financial Officer Domenic Dell’Osso said on Wednesday. Lawler and his CFO both commented during the call with analysts.

Lawler’s effort to transform the second-largest U.S. natural gas supplier into an oil producer has been hobbled as falling gas prices crimped cash available to drill new wells.

U.S. gas traded at an average $2.737 per million British thermal unit during the second quarter, down 40 percent from $4.579 a year earlier.

The company’s second-quarter output was 17 percent crude, up from 16 percent during the year-earlier period, according to the statement. The rest was gas and so-called gas liquids such as propane.

Excluding the writedown and other one-time items, Chesapeake’s 11-cent per-share profit matched the average of analysts’ estimates compiled by Bloomberg. Chesapeake reported a profit of $191 million, or 22 cents, a year earlier. The company said in a filing that it expects to make another writedown of its fields during the current quarter.

Chesapeake has declined 63 percent this year, compared to an average gain of 2 percent for the S&P 500 Index. Chesapeake is the second-largest U.S. gas producer. Exxon Mobil Corp. is the biggest.

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