Chesapeake: Debt repayment, cost among key challenges

Chesapeake listed lowering its debt and ensuring that it is able to contain the expected increase in services costs through continued technology improvements as key challenges this year.

Chief executive Doug Lawler has sold non-core assets to help pay down billions of dollars of debt taken on earlier under an asset acquisition spree. As producers including Chesapeake step up drilling activities amid a recovery in prices, many expect costs of oilfield equipment such as rigs to rise this year as demand improves and services companies pare back on the discounts they have been offering through the downturn to retain share of the market.

"We have to continue to look for opportunities to reduce to our debt, so that really is our primary challenge," Lawler said on the sidelines of the CeraWeek conference in Houston. "We see service cost escalation, and it is an important thing for us to continue to monitor to make sure we don't lose any ground."

The independent ended 2016 with slightly more debt, about $10bn compared to $9.7bn a year earlier, but has already cut it by $901mn since the start of the year, which included repaying $258mn of notes that came due in January. It also lowered its production expense last year by $336mn, or 28pc, from a year earlier, which in part helped generate $600mn in annual savings.

Chesapeake sees a cost increase of as much as 25-30pc in some services, particularly equipment needed to a complete well, and in sand used to fracture a well as producers first start to bring on line their inventory of drilled but uncompleted wells. In aggregate, it expects costs to rise by 10-15pc, Lawler said.

It expects its debt repayment to be driven by selling more assets, after sales of $2.5bn last year.

"We still have a significant inventory, and the principal avenue would be through additional assets sales," Lawler said. "We seem to see a good level of interest in anything that we have discussed."

Chesapeake expects a further step up in merger and acquisition (M&A) activity this year as oil prices stabilize, which is allowing producers tap equity markets to raise funds and banks to again start lending to producers. Last year, particularly in the first half, M&A activity did not take off despite the pressure on the industry to sell assets to shore up their balance sheet because no one had a sense of the direction of the oil market. It was like "you make a bet and try and catch a falling knife," Lawler said.

Lawler's views on a step up in M&A were echoed by Marcel van Poecke, managing director of energy partnership at private-equity Carlyle International Energy Partners.

"We are seriously putting capital to work in the upstream," Poecke said. "A lot of capital is available in the US. IPO [initial public offering] markets are wide open."

Companies are now raising money to fund M&A and growth compared to the past two years of the downturn when it was more to repair their balance sheet, Osmar Abib, managing director of global oil and gas at Credit Suisse said. Abib also expects overseas companies such as those from Japan and China to renew acquisitions of shale properties.