Chesapeake Natural Gas Regrouping for Tomorrow

By Dan Lonkevich

Dec. 5 (Bloomberg) -- Chesapeake Energy Corp., the second- biggest independent U.S. natural-gas producer, cut its capital budget and said it plans to build “substantial” cash resources over the next two years because of a plunge in prices.

Gas for January delivery fell 27.8 cents, or 4.6 percent, to $5.739 per million British thermal units at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. The fuel touched $5.712, the lowest since prices reached $5.249 per million Btu on Sept. 10, 2007.

Chesapeake, based in Oklahoma City, dropped 52 cents, or 4.4 percent, to $11.32 in composite trading on the New York Stock Exchange. The stock declined as much as 17 percent before the company announced the budget cuts and cash plan in a statement today. The stock has plunged 71 percent this year.

“This is a step in the right direction, and it’s what people wanted to see,” Joseph Magner, a Denver-based analyst for Tristone Capital Inc., said today in a telephone interview. “The challenge now is, what are the details and what does it imply for production growth and cash flow?”

Chesapeake said in September it was cutting capital spending by $3 billion through 2010. The company has been selling stakes in its best properties to help pay down debt and raise money for additional exploration.

More Cuts

“They’re going to have to cut $1.35 billion to $1.4 billion based on keeping a production growth rate of 16 percent,” Magner said regarding 2009. “They have an additional $1.25 billion to $1.75 billion planned for acquisitions and leaseholds and potential proceeds from asset sales. We wouldn’t be surprised to see another $3 billion or more in spending cuts.”

Chesapeake sold an interest in its Marcellus Shale assets to StatoilHydro ASA for $1.25 billion in November. BP Plc, Europe’s second-biggest oil company, bought a stake in the Woodford Shale asset for $1.75 billion in July and an interest in the Fayetteville Shale for $1.9 billion in September.

Devon Energy Corp. is the largest U.S. independent oil and gas producer. Independent producers are those without refining assets.

(Chesapeake has scheduled a conference call on Monday, Dec. 8, 2008, to discuss its plans. To listen, dial +1-913-312-1236 or +1-888-211-7383 and enter passcode 1193464.)

To contact the reporter on this story: Dan Lonkevich in New York at dlonkevich@bloomberg.net