By the mid of 2020, the Covid-19 pandemic and the lockdowns lead to the significant drop in revenue, ultimately resulting in the company filing for bankruptcy protection due to its over-ambitious expansion. Yet, in the first nine months of last year, Chesapeake generated $1.3 billion of profit, and also distributed $800 million in dividends among its shareholders. Additionally, its stock price more than doubled in 2021 after the company relisted its shares. Interestingly, despite the push for clean energy by the current administration led by Biden and a history of erratic investments and heavy debt-dependency, fossil fuels have shown a remarkable resilience owing to a combination of factors such as the Russian invasion of Ukraine and the U.S economic recovery.
The production of natural gas, which is Chesapeake’s area of expertise, has reached all-time high levels in the U.S. While crude oil production is yet to match the levels of 2019, it is still at a peak. Exports of both natural gas and crude oil have also reached new highs, easily surpassing overseas sales of aircraft, pharmaceuticals, food and cars. Companies such as Exxon Mobil Corp, experienced an 80% increase in stock prices last year.
Despite the Biden administration’s efforts to restrict drilling on federal lands, oil and gas companies have turned to tapping the nation’s vast private shale reserves to drive production higher. As global demand for U.S. oil and gas has skyrocketed, resulting in high profit margins for producers, the President has accused them of profiteering during the crisis, but industry leaders see it differently – “What’s really happened is the world has realized there is a need for hydrocarbons in energy policy,” said Domenic Dell’Osso, CEO of Chesapeake.
Chesapeake, who recently added a seventh drilling rig to the Haynesville basin, a massive natural gas field spanning east Texas and northwest Louisiana, has had a history of booms. There were a total of 69 drilling rigs in operation as of early January compared to 32 in summer of 2020 and the local economy is reaping the benefits.
This current boom, however, is different from the past ones. In the previous natural gas surges of the decade leading to 2020, drillers expanded at a rapid pace, incurring a lot of debt in the process. They flocked to the Haynesville region when gas prices were high, but just as quickly left when prices fell, taking away jobs, tax revenue and royalties from landowners.
This time, due to a combination of domestic and international factors, companies are betting on a steady demand for Haynesville gas for the foreseeable future. Additionally, shareholders are urging companies to return more of their profits to investors instead of using it for expansion, which is a strategy that positions them to handle fluctuations in commodity prices better, according to executives and analysts.
Another significant change is that the bulk of the revenue for producers is coming from exports, which reduces the impact of increased production on lowering prices for American consumers. Recently, mild winter temperatures caused natural gas prices to drop below $4 per million British thermal units, however, experts predict that exports will help maintain high prices in the years to come.
This is due to several factors, such as the lack of sufficient pipeline capacity to transport more gas from fields in Appalachia to heavily populated regions like the Northeast, while it is relatively easy to move large quantities of gas from places like the Haynesville basin to terminals on the U.S. Gulf Coast for shipping in liquefied form to Europe that has been cut off from Russia.In the third quarter of 2022, Chesapeake was able to extract 1.6 billion cubic feet of gas per day from the Haynesville basin, with plans to slightly increase production in 2023. Comstock Resources, a competing company majority-owned by Jerry Jones, also announced plans to expand drilling in the area. Chesapeake, founded by Aubrey McClendon, was one of the first to use horizontal drilling and hydraulic fracturing to unlock large amounts of natural gas. While they drew gas from shale formations, they also acquired millions of acres of mineral rights with billions in debt. However, overproduction caused gas prices to drop, resulting in diversifying production and downsizing operations. Despite these struggles, they are betting on the world’s continued reliance on fossil fuels and natural gas as a bridge to renewable energy.
Chesapeake, a natural gas and oil company, has shifted its focus from growth to cash generation and investor payouts after emerging from bankruptcy in early 2021. The company reduced its debt by $7.8 billion during the process, acquired additional gas assets in the Haynesville, and signed a 36-month agreement to supply 300 million cubic feet of gas per day to Golden Pass LNG, an export terminal set to come online in 2024. The U.S. is expected to double exports of LNG to nearly 24 billion cubic feet per day by 2030, and much of the supply will come from the Haynesville. However, domestic energy costs have not decreased due to lack of infrastructure. Increasing exports and global gas market prices have resulted in higher domestic prices, and it is unlikely that prices will return to pre-pandemic levels of less than $3/million BTU. Chesapeake has also cut back on capital expenditures, and investors prioritize returns over growth in an industry with uncertain prospects.