Chesapeake Energy is discovering the price of its costly quest for oil. The embattled driller is offloading another $1 billion of assets. It needs cash because even though Chesapeake has found more U.S. crude than any rival, including Exxon Mobil, in recent years, it spent too much to do so. Founder Aubrey McClendon may be gone, but his painful legacy lingers.
The low price of natural gas has taken a big toll on Chesapeake. The fuel accounts for about 75 percent of production. Its response, like that of competitors in the space, was a desperate search for more lucrative oil. Even critics would have to concede that in this regard the company succeeded.
Chesapeake added 705million barrels of U.S. oil to reserves the last two years, making it the nation’s most successful explorer, according to research by consultancy IHS. In 2012 alone, the Oklahoma-based company uncovered twice as much oil as Chevron, whose $230 billion market value is over 16 times higher than Chesapeake’s.
This enterprising result isn’t all it’s cracked up to be, though. Since 2011, Chesapeake has shelled out about $25 billion for the finds, equivalent to about $35 a barrel. By comparison, EOG Resources, the No. 2 discoverer, invested just $23 on average for each of the 647 million barrels it found. Continental Resources spent just $20. And Chesapeake’s result is flattered by its tendency to book reserves at an earlier stage of development than rivals.
The sale to Exco Resources announced on Wednesday - part of a broader $7 billion initiative - shows that Chesapeake is making progress to shore up its balance sheet following Mr. McClendon’s splurge. New Chief Executive Doug Lawler says this year’s capital expenditure budget is now fully funded.
Even so, Chesapeake’s financial straits have made it tough to secure top-notch valuations for the properties it is flogging. For example, production from the shale acreage it is selling to Exco, including 6,100 barrels of oil a day and 114 million cubic feet of gas, were alone worth about $1 billion based on oter recent deals, according to Brean Capital. That means Chesapeake is pretty much giving away the undrilled land for free. The recovery, it would seem, comes with a price of its own.
Christopher Swann is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
