Chesapeake Energy Corp., the second-largest U.S. natural gas producer, said on Thursday it will stop spending richly to buy new fields and instead focus on cutting its huge debt and slowing output growth.
The self-described "fundamental shift" comes weeks after billionaire investor Carl Icahn raised his stake in the company to 5.8 percent, saying in a regulatory filing that the stock was undervalued. That is a common theme for investors who have watched the stock consistently underperform its peers.
Since Icahn — who has held talks with Chesapeake's management — raised his investment in Chesapeake, the stock has climbed 13 percent. Its shares rose almost 2 percent Thursday.
"We think investors should like the new capital discipline from Chesapeake (smells like Carl Icahn is behind this), and we hope the company follows through," analysts at CapitalOne Southcoast wrote in a morning note to clients. "Chesapeake's old habit of spending billions on acreage and increasing production guidance will be hard to break."
Chesapeake has been hurt by the weakness in prices for natural gas as massive new fields have come on line. It has been the industry's most aggressive in snapping up acreage in shale rock formations, but has taken on huge amounts of debt to finance the expansion.
Chesapeake said it plans to cut long-term debt 25 percent over the next two years by reducing its spending on leases and raising cash through its assets.
"This plan represents a fundamental shift from our aggressive asset accumulation of the past few years to a multiyear period of asset harvest, characterized by a clear focus on capital discipline and maximizing returns," Chief Executive Officer Aubrey McClendon said in a statement.
It cut its output growth target to 25 percent over the next two years, down from its previously planned 30 percent to 40 percent growth rate.
The company's net long-term debt stood at $11.45 billion at the end of the third quarter, down from $12.3 billion at the beginning of 2010.
The company vowed not to issue any common or preferred stock to achieve its debt reduction objective — a promise it has made and broken before.
The company has had success in finding partners to invest in its new fields, and has struck several volumetric production payment deals that lock in the prices of its production from specific fields.
Chesapeake's 2010 proved reserves rose 18 percent from the end of 2009 to 16.9 trillion cubic feet equivalent (cfe).
Daily production for the fourth quarter averaged about 2.9 billion cfe per day, down 4 percent from the third quarter, but 11 percent higher than the previous year.
Chesapeake's daily production for the 2010 full year averaged approximately 2.8 bcfe, an increase of 14 percent over the 2.5 billion cfe of daily production for the 2009 full year.
Chesapeake's shares rose 2.1 percent, or 57 cents, to $27.08 in morning trading on the New York Stock Exchange.
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