Chesapeake Energy Corporation (CHK)’s Production Mix Is Moving Towards Liquids

After 24 years at the helm of Chesapeake Energy Corporation (NYSE:CHK), co-founder and CEO Aubrey McClendon will retire from the company on April 1, 2013. It was his innovative — and borderline reckless — purchasing that made Chesapeake’s asset value the envy of the US energy industry. At a time when other producers were still scratching their heads at the prospect of developing shale gas, Chesapeake pioneered the practice. When the industry ate itself and over-produced, sending natural gas prices in the US plummeting, Chesapeake nearly went bust.

Now that McClendon is on his way out, Chesapeake is struggling to become more profitable in a tough market for natural gas by producing more natural gas liquids and oil from its existing assets. According to the company’s latest investor presentation, NGLs comprised only 21% percent of Chesapeake Energy Corporation (NYSE:CHK)’s 2012 production, but 59% of realized revenues.

Plenty of onshore US natural gas liquids assets to develop

Chesapeake intends to increase profitability by focusing mostly on its liquids rich plays, of which it has plenty. Chesapeake is the largest leaseholder in the Eagle Ford, Utica, and Marcellus Shales. The company’s headquarters in Oklahoma City is within a day’s drive from four liquids rich plays in the Anadarko Basin.

Impressive liquids production growth at Eagle Ford Shale

During the Q4 earnings call, COO Steve Dixon highlighted Chesapeake’s Eagle Ford Shale progress as an example of what the company intends to do across all its liquids rich plays. The company’s liquids production at Eagle Ford Shale increased more than three times year over year from an average production rate of 12,300 barrels per day in Q4 2011 to 50,800 barrels per day in Q4 2012. By the end of 2013 the company expects an average production rate of 70,000 barrels per day of natural gas liquids from the Eagle Ford Shale alone.

Looking forward

During 2012 Chesapeake produced 1,129 bcf of natural gas, 17,615 Mbbls of NGLs, and 31,265 Mbbls of oil, which produced an operating cash flow of just over $4 billion. In 2013, the company expects to decrease natural gas production by about 7%, increase NGL production by about 42%, and increase oil production by about 18%. Operating cash flow is expected to come in at between $4.85 billion and $5.15 billion. Those numbers are based on the assumption that NGL prices don’t fall much further than they did during 2012.

Chesapeake not the only producer making the shift towards liquids

Marathon Oil Corporation (NYSE:MRO) is also shifting towards natural gas liquids. The company reported an increase in NGL production of 107% year over year from about 46.7 Mbbls in 2011 to about 97 Mbbls in 2012. Marathon also has assets in the Eagle Ford Shale that averaged over 65,000 barrels per day in 2012, with plans to continue increasing production there.

Anadarko Petroleum Corporation (NYSE:APC) is another large producer of natural gas liquids operating in the Eagle Ford Shale, and throughout the US. Over the past two years Anadarko has increased its US sales volumes of NGLs from 23 million barrels in 2010 to 30 million barrels in 2012. Although Anadarko has widespread global operations, it too is enjoying increased profits from NGL production in the US.