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Chesapeake Expects Gas and Oil Reserve Values to Dwindle

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Nov. 23 2015, Updated 12:07 p.m. ET

Value of reserves

Chesapeake Energy (CHK) expects the value of its reserves to fall to $4.2 billion in the fourth quarter of 2015. In the same period a year ago, the value of the company’s reserves stood at $22 billion.

Management is anticipating further write-downs in the coming quarters, as it recorded $15 billion in impairment charges in the nine-month period ended September 30, 2015, diminishing the hopes of oil and gas price recovery. The persistent fall in oil and gas prices has severely dented the books of energy exploration and production companies.

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Chesapeake’s reserves

Chesapeake reported net proved reserves of nearly 2.5 billion boe (barrels of oil equivalent) and production of 707 boepd (barrels of oil equivalent per day) in the year ended 2014. This accounts for a year-end reserve life of just below ten years.

In the third quarter of 2015, production was 66,000 boepd, indicating a falling trend given reduced rig activity. Falling reserve values tighten companies’ belts and push them to raise capital to fund new and ongoing projects.

Cash from operations is majorly consumed by energy producers’ debt these days due to lower realized prices. According to the EIA (U.S. Energy Information Administration), as much as 83% of cash flow from operations was being utilized to repay debt in 2Q15, the highest amount in the last thirteen quarters.

Mid-size explorers such as CONSOL Energy (CNX) and Newfield Exploration (NFX) are facing tough times due to inflated debt burdens and weakening cash from operations.

Chesapeake Energy is the second-largest producer of natural gas (UNG) and the 12th-largest producer of crude oil and natural gas liquids. It has a production mix of 71% natural gas and 16% crude oil (USO).

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