Chesapeake Energy wants to make LNG deals, invest in export terminal

Shale gas producer Chesapeake Energy will try to capitalize on its enlarged Haynesville Shale position along the US Gulf Coast by cutting more deals for LNG exports priced at global indexes, executives said.

The company might take a stake in an LNG terminal in the future and is already looking for direct contracts with overseas consumers, all in an effort to get higher prices, Chesapeake CEO and President Nick Dell'Osso said on a May 5 call to discuss first-quarter earnings.

Chesapeake is joining its shale gas competitors in pressing for pipeline improvements and new LNG export terminals to ship gas to Europe and break the continent's dependence on Russian natural gas after the invasion of Ukraine.

"If the deal is linked to Henry Hub [in the US], that is not as attractive to us," said Mohit Singh, Chesapeake executive vice president and CFO. "What we are trying to diversify into is some sort of LNG index deal" at, for example, the Dutch Title Transfer Facility, or TTF.

Singh said Chesapeake's natural gas production in the Haynesville, certified as lower in emissions, will attract European companies and other buyers interested in low-carbon gas.

Chesapeake pursues international markets

Observers said deals are in the works. "Chesapeake is in discussions to sell its natural gas internationally with the potential for numerous options, including entering synthetic transactions with a bank or counterparty, physical transactions with an LNG provider ... or entering into an agreement directly with an end-user," veteran shale gas analyst Gabriele Sorbara of Siebert Williams Shank & Co. told clients. "Chesapeake expects to have an announcement this year — stay tuned."

Dell'Osso said he doubts US natural gas prices, currently at 14-year highs above $8/MMBtu, will remain elevated for long. "The prompt month prices are so far above break-evens for supply in the US that we just don't expect that to be a persistent price environment. ... There are ample resources in this country to drive prices below $4 at the long end of the curve."

Chesapeake raised its estimate of 2022 adjusted free cash flow to $2.7 billion, with $532 million of free cash reported in the first quarter, a company record. Chesapeake said it would distribute 56% of the cash through a combined base and variable dividend of $2.34 per share while spending another $83 million to buy back its own shares.

Chesapeake kept first-quarter capital spending to $344 million, below its guidance, while producing 60,000 barrels of oil per day and 3.2 Bcf/d of natural gas, slightly above guidance. Because it did not emerge from bankruptcy until February 2021, there were no year-over-year comparisons for the first quarter. Dell'Osso said Chesapeake will keep spending consistent with its guidance of $1.65 billion for the full year.

Shareholder moves against oil

Chesapeake is under pressure from activist shareholder Kimmeridge Energy Management Company to increase the value of its shares by shedding shale oil operations in Texas and focus on natural gas alone.

"Chesapeake trades at one of the lowest valuation multiples and highest [free cash flow] yields in the sector despite the company's high quality assets in the core of the Marcellus and Haynesville," Kimmeridge said in an email May 5. "The stock has materially underperformed its gas-weighted peers, which we believe is a direct result of the lack of strategic clarity coming out of bankruptcy."

Chesapeake emerged from bankruptcy in early 2021, selling itself to new investors as a low-cost shale gas producer. It sold oil wells in Wyoming's Powder River Valley but retained shale oil plays in Texas' Brazos Valley and Eagle Ford Shale.

Dell'Osso told analysts that the shale oil operations are money makers with high oil prices, and the company constantly evaluates whether they are worth more inside Chesapeake or sold to somebody else.