Markets

Chesapeake Digs in for Long Haul on Shale Gas

By Bob Williams

Updated on: February 25, 2009 / 1:21 PM EST / MoneyWatch

Chesapeake Energy is digging in for the long haul on shale gas as it weathers the market downturn. The one-time Wall Street darling took a rough tumble in second half of 2008, posting an $866 million net loss in the fourth quarter alone.

The natural gas producer had been riding a wave spawned by the hottest drilling play in North America: shale gas. Since 2000, the company has amassed the largest packages of onshore leases and seismic data coverage in the U.S. and took the top positions in the nation's four biggest shale plays: Barnett, Haynesville, Fayetteville, and Marcellus. Its aggressive shale gas initiative propelled it to the No. 1 spot in terms of total U.S. drilling and natural gas production.

But the shale gas play has become a victim of its own success. While shale drilling drove U.S. gas well productivity, reversing a long-term decline, the supply/demand balance swung into negative territory, pushing natural gas prices from a high of more than $13 per thousand cubic feet (Mcf) to slightly above $4 per Mcf today.

Apart from CEO Aubrey McClendon's own plight -- he was forced to sell all of his stock to meet a margin call when he guessed wrong on the outlook for natural gas prices -- Chesapeake went into in wallet-squeezing mode after gas prices tanked in the second half of 2008. The company also found it increasingly difficult to service the massive debt acquired in its acreage-shopping spree and aggressive exploration and development programs.

Then Chesapeake saw its stock price nosedive along with the NYMEX futures price for natural gas and acted just as aggressively yanking on the reins as it did when expanding. The company:

axed its capital budget by a combined total of nearly $10 billion for 2009 and 2010;
sold big chunks of its shale assets to European giants BP and StatoilHydro for a combined total of $7 billion; and
issued $425 million in senior notes to repay outstanding bank debt.

Despite the budget cuts, the company retains a robust shale gas drilling program. And McClendon has taken to the hustings to tell anyone who will listen that Chesapeake is casting its lot with shale gas, contending that natural gas -- with the lowest carbon emissions among fossil fuels -- is the bridge to a greener energy future and that shale gas is the keystone to that bridge.

Whether changing U.S. energy policy proves him right is hard to say at the moment, but Chesapeake has hunkered down for that to happen.