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Chesapeake reduces drilling budget

Chesapeake Energy plans to reduce its drilling capital expenditure (capex) budget during the second half of 2008 through year-end 2010 by approximately $3.2 billion (17%), in response to an approximate 50% decrease in natural gas prices since June 30, 2008 and concerns about the possibility of an emerging US natural gas surplus in advance of increased demand from the US transportation sector.

Of the $3.2 billion reduction, $0.8 billion is attributable to the drilling capex carry associated with the company's recently closed Fayetteville Shale joint venture with BP America, $0.5 billion is attributable to the drilling capex carry anticipated in a Marcellus Shale joint venture, and $1.9 billion is attributable to reduced drilling activity.

The company plans to reduce its current operated drilling rig count of 157 rigs to roughly 140 rigs by year-end 2008 and expects to keep its rig count relatively flat through 2009 and 2010.

In addition, the company will temporarily curtail a portion of its unhedged natural gas production in the Mid-Continent region due to unusually weak wellhead natural gas prices. The company has curtailed nearly 100 MMcf/d of net natural gas production and plans to restore this production once natural gas prices recover.

This curtailment represents nearly 4% of the company's current net natural gas and oil production capacity of over 2.3 bcfe/d (92% natural gas).

Along these lines, the company has reduced its full-year 2008 production growth estimate to 18% from 21% to account for the temporary curtailment, the sale of 45 MMcfe/d of production associated with its Fayetteville Shale joint venture with BP, the anticipated sale of 60 MMcfe/d of production in the 2008 fourth quarter associated with the company's fourth volumetric production payment (VPP) and shut-ins in the 2008 third quarter of onshore production associated with natural gas processing plant limitations as a result of damage by Hurricane Ike.

Additionally, as a result of reduced drilling activity levels announced today, the company has lowered its anticipated production growth forecasts in 2009 and 2010 to 16% per year from 19% per year.

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