Where Is Chesapeake Energy Allocating Its Capex Budget in 2016?
Chesapeake’s 2016 capex guidance
Chesapeake Energy (CHK) has provided a 2016 capex (capital expenditure) guidance range of $1.3 billion–$1.8 billion. This represents a 57% YoY (year-over-year) reduction. CHK noted that its 2016 capex will focus on shorter cash cycle projects, which will generate positive rates of return at current commodity prices. Accordingly, its capex will focus more on completions and less on drilling. CHK’s total completion spending is slated to be ~71% of its total drilling and completion capex budget.
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Additionally, CHK has allocated almost one-third of its capex budget to the Haynesville Shale and Eagle Ford Shale and ~22% to the STACK basin in the mid-continent region.
In its 4Q15 earnings release, Chesapeake Energy stated, “This program, combined with the improving quality of the company’s operations, its capital efficiency and lower service costs will provide incrementally positive economics, even in today’s commodity price environment.”
Many upstream companies have slashed their 2016 capital expenditures. Anadarko Petroleum (APC), ConocoPhillips (COP), and Hess (HES) have announced capex cuts of ~50%, ~37%, and 40%, respectively, compared to 2015 levels. All these companies make up ~8% of the Energy Select Sector SPDR Fund (XLE).
CHK’s 2016 cost guidance
CHK expects to reduce the base decline rate of its wells by ~10% this year. This will be instrumental in increasing its EBITDA (earnings before interest, tax, depreciation, and amortization). Additionally, the company continues to employ cost-efficient measures as it did in 2015. The company reduced its LOE (lease operating expenses) per barrel of oil equivalent by 10% YoY in 2015. G&A (general and administrative) expenses declined 24% YoY. This year, CHK expects its LOE and G&A expenses per barrel to decline by 10% and 15%, respectively.
CHK’s capex and cost reduction efforts will complement its debt reduction efforts and lead to improvement in its financial position.