After recording losses of $2 billion in the third quarter of fiscal 2012, Chesapeake Energy Corporation (NYSE:CHK) has been a recurrent topic in the headlines. News just in confirms that the loss has raised eyebrows in the state of Ohio. Although Chesapeake’s shrewd cost reduction programs have taken their toll on residents of the state, Ohioans are more concerned about the effects that the colossal loss will have on shale gas drilling in the Utica shale region.
Analysts are inclined to believe that the loss will negatively affect drilling activities in the Utica shale region. Nonetheless, they argue that the effects of the loss will not surface in near future. On the contrary, they believe that the lack of infrastructure and pipeline for future production will have more a profound near-term effect on drilling. Analysts also disputed speculation that the loss was traced to low expectations on Utica’s prospects, citing that the losses were instead caused by the company’s decision to write down the value of its reserves in light of low gas prices.
Given the situation, Chesapeake Energy Corporation (NYSE:CHK) will be compelled to curtail spending and push for infrastructure development, note the analysts. Joseph Allman, an analyst with JPMorgan, penned a write up on Chesapeake’s earnings. “We think the earnings are a mixed bag,” he noted. Allman was also optimistic about the company’s frenzied asset sale. Nevertheless, he was keen to note that Chesapeake Energy Corporation (NYSE:CHK) had raised its costs on exploration and development. According to Allman, the increase in exploration and development costs creates what he calls a ‘funding gap’, which is essentially a situation where a company lacks adequate financial resources to meet future needs. As such, Chesapeake needs a way to net more money, preferably heightening the pace on asset sales.
It is believed that shale regions in Ohio have more oil and natural gas liquids when compared to other U.S. shale regions. Oil and natural gas liquids prices have held up better than natural gas and as such, present a better opportunity for the Chesapeake.
Chesapeake Energy Corporation (NYSE:CHK)’s undisguised enthusiasm over the Utica Shale region was clearly displayed by company CEO Aubrey McClendon who, in a Nov 2 conference call with security analysts, shared insights on the opportunity that the shale region presented for the company.