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Chesapeake cutting back in Haynesville

Low gas prices leads US independent to cut drilling as it concentrates on strong crude output

US independent Chesapeake Energy is reducing its drilling activity in the gassy Haynesville shale of Louisiana in response to low commodity prices, though it plans to keep production in the Marcellus shale in north-east Pennsylvania flat.

Chesapeake currently has one rig working in the Haynesville and plans to take that down to zero in the near future, the company said this week.

"We will constantly evaluate that capital allocation and redirect investments where we can capture the best return," chief executive Doug Lawler said on the company's second-quarter earnings call.

"That said, though, the economics and the margins that we're capturing from the oil investment make it difficult to see a lot of capital going back to the Haynesville anytime in the near future," he cautioned.

US natural gas prices have sunk in recent months as production from shale plays continues to grow.

Chesapeake realised $2.39 per million cubic feet of Haynesville gas production in the second quarter, compared with $2.63 in the same period a year ago.

This week, the company outlined its plans to concentrate spending on oil assets as it expects to continue to log strong crude production growth to the end of 2020 as it focuses on its oily Eagle Ford and Powder River basin assets.

It expects to record a sharp drop in average gas output in the next 18 months because of its focus on oil.

However, Chesapeake plans to keep natural gas output in the Marcellus flat in 2020.

The company pointed to low break-evens and higher returns in the play as the major factors behind that decision.

At current activity levels, Chesapeake has about 10 years of Marcellus drilling inventory at a break-even of $1.50 to $1.75 per thousand cubic feet.

"That remains one of the top rate-of-return investments in our portfolio and we expect that production to remain relatively flat as it has for the last few years," Lawler said.

The company has two rigs working in the Marcellus and placed 14 wells on production during the second quarter. Chesapeake expects to bring 12 wells on production during the third quarter.

Company officials emphasised that the decision to tap the brakes in the Haynesville is a short-term one based on low commodity prices.

"I don't expect that we'll stay at zero rigs forever," chief financial officer Nick Dell'Osso said.

"I would think that at some point the gas market will begin to look at some sort of a rebound here and come back to some sort of a reasonable level where the Haynesville is more economic now than it is today."

Lawler also said the company was "excited" by other opportunities in the Haynesville area, such as the Cotton Valley formation.

"The Cotton Valley is a horizon that we have not actively invested in, to my knowledge, here at Chesapeake, and we have a great acreage position that we can continue to look for economic development there in the future," he said.

Chesapeake reported a second-quarter net profit of $98 million against a loss of $249 million in the same period a year ago. Revenues were $2.39 billion as compared with $2.29 billion in 2018.

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