LAGCOE ’15: Chesapeake CEO Doug Lawler outlines survival and growth strategy
Oct 28, 2015
LAGCOE’s keynote speaker on Tuesday, Oct. 27 was Doug Lawler, CEO of Chesapeake Energy, who spoke of returning home to Lafayette, where he got his start in the oil and gas industry at Kerr-McGee, prior to its acquisition by Anadarko.
"I feel like I’m coming home,” explained Lawler. "This was the foundational place for my career and family. The nine years I spent here was one of the best periods of my life.”
It was a painful time as well due to the passing of his first wife due to cancer. The Lawler Foundation he started to help mothers stricken with cancer continues its work in Lafayette.
Speaking of the current economic conditions, Lawler said, "We’ve enjoyed some of the best boom times for the industry, but now we’re back, where we have to have to depend on having good people, good technology and innovative ways to get things done, because of the rude awakening of the external pricing factors that we cannot control. It is a worthy challenge for all of us.”
At Chesapeake, Lawler took over from Aubrey McClendon, under whose leadership, the company enjoyed spectacular growth. "We were under significant financial duress due to the financial instruments used for an earlier strategy of growth. Seeking top-quartile performance, we switched to a strategy of value through financial discipline, improving capital efficiency, cost structure improvements, and preserving our cash-flow generation capability.” As a result, Chesapeake now has $1.5 billion in cash, giving the company the flexibility to survive under difficult conditions and plan for future growth.
In these hard times, many operators have cut back on exploration. Countering that position, Lawler said, "Exploration is where the greatest organic growth comes from. We can be highly efficient in our operations, but growth comes from exploration.”
Lawler said Chesapeake’s gas producing assets in the Marcellus, Utica and Haynesville require $2.50/Mcf price. "When I see gas trading at $1.95/Mcf, it is absolutely frightening. No one is making money.” Over the next five years, Lawler expects gas price to remain in the $2.50-$3.50/Mcf range. On the oil side, Lawler said Chesapeake’s crude producing assets require a $50/bbl breakeven price.
Speaking of the drop in oil prices, Lawler said, "We’re facing an inventory problem. It is not a demand problem as much as a supply problem. A 1% oversupply has caused a 60% drop in price. We have 240 MMbbl of global inventory surplus and 100 MMbbl in the U.S. Until the supply is diminished, we will continue to see oil prices remain in the $45-$55/bbl range, absent of a disruption in the Middle East.”
Lawler also questioned Saudi Arabia's strategy of market-share preservation. "The time value of money is not shared in the rest of the world. It is beyond me that you would want to maintain the current 10 MMbopd of production at $50/bbl, rather than cut 1 MMbopd and earn $80/bbl for 9 MMbopd of production. I can do that math, so it doesn't make sense to me."
Lawler expects IOCs to serve as the swing producers. "As we burn through the inventory over the next year or two, shale production will start going up. It is the deepwater projects that will have to be sacrificed. Many of the deepwater projects around the world have been postponed or delayed. The IOCs will require crude oil price of over $60/bbl for a long time to start investing in deepwater projects again.”
Over the long term, Lawler sees a strong uptick in demand. He gave a specific example, "China is growing at 7%, which is still phenomenal. They are consuming 500,000 bopd more this year. There is no mistake growth will happen. It is only a question of when.”
For the time being, Lawler said, "We need a strategy of relentless pursuit of improvement. In the Gulf Coast and around the world, it is a question of how we survive and survive together. ”