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Chesapeake hits brakes in Haynesville

US independent to take rig programme in gas play down to zero in near future

US independent Chesapeake Energy is reducing its drilling activity in the gassy Haynesville shale play of Louisiana in response to low commodity prices and a growing focus on the company's oil assets.

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

Chesapeake targets oil asset spending

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"If we were to recognise better pricing in 2020, 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."

US natural gas prices have sunk in recent months as the nation's production from shale plays continues to grow. Chesapeake realised $2.39 per million cubic feet of Haynesville gas production in the second quarter of 2019, compared with $2.63 in the same period a year ago.

In its earnings release, 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. It also said it expects to record a sharp drop in average gas output in the next 18 months because of its focus on oil.

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 on the call.

"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."

He added: "This is not a departure from the Haynesville by any stretch, but it is in the near-term a recognition that with gas in the low $2 on a prompt and falling in 2020 that it probably makes sense for us to focus on free cash flow for the immediate term."

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.

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