In ’single largest strategy shift’ in company’s history, Chesapeake Energy moving into oil

Chesapeake Energy plans aggressive move into oil

OKLAHOMA CITY — Chesapeake Energy Corp. CEO Aubrey McClendon said Wednesday the company was aggressively moving into oil and natural gas liquids production as part of a plan developed two years ago.

The Oklahoma City-based independent producer has long been known for its laser-like focus on natural gas production, particularly from unconventional shale formations. But during a conference call with analysts, McClendon said company executives determined in 2008 that oil prices would outperform natural gas prices “for a long time to come” and that the company’s long-term interests would be better served by increasing its oil production.

In trading Wednesday on the New York Mercantile Exchange, benchmark crude for September delivery was at $82.26 a barrel — close to a three-month high — while natural gas was at $4.678 per 1,000 cubic feet.

“Oil prices are going to be strong for a long time until this world figures out that you can substitute something cheaper for oil, which is natural gas,” McClendon said.

McClendon said “the ultimate goal is to make a bunch more money doing what we’re doing” and the best way to do that was to replace production of natural gas with that of oil.

Chesapeake began acquiring leaseholds for its move into oil in 2008, McClendon said, but because of the time required to put those leaseholds together and to test unconventional methods of extracting oil, it’s taken until now for the results of those efforts to show.

The company said it’s spent $2.4 billion this year to acquire leaseholds in what McClendon called the “single largest strategy shift” in Chesapeake’s 21-year history. He earlier said the company plans to reduce drilling of natural gas wells until natural gas prices rise to about $6 per 1,000 cubic feet.

He said the company is committed to that strategy, so much so that it plans to reduce its 2011 capital spending on natural gas by $400 million and increase spending on oil by the same amount.

Even with the recent strategy change, natural gas still accounts for 90 percent of Chesapeake’s total production. But the company now says it expects to increase its oil and liquids production to about 25 percent of total production — and 40 percent of production revenue — by the end of 2015.

“We believe that, unlike with natural gas, Chesapeake’s success in finding large new reserves of unconventional oil in the U.S. will not negatively affect oil prices,” McClendon said. “Obviously, this has not been the case with our large discoveries of unconventional natural gas during the last few years.”

During midday trading Wednesday, Chesapeake’s stock was at $22.30, up 47 cents.