Things are already bad for oil companies as crude prices decline. The rise of the U.S. dollar against foreign currencies such as euro isn’t making things any better for Chesapeake Energy Corporation (NYSE:CHK) and its U.S. peers. However, the company has been trying to adjust capital allocation with the hope of preserving cash and boosting returns amid the turmoil.
The U.S. dollar recently managed to reach a nearly 12-year high against the European common currency, euro. That came after the dollar jumped to a near 8-year high against the Japanese yen. The developments saw massive declines in the U.S. stocks, especially in the commodity sector. Strength of the U.S. currency may be good news elsewhere but certainly bad news for Chesapeake Energy Corporation (NYSE:CHK) and others that export oil.
The trouble with a stronger U.S. dollar is that it makes dollar-priced commodities more expensive for foreign buyers. The result is that the buying power of customers who hold weaker currencies is reduced thereby impacting sales.
Slowdown in capital spending
To outlive the various challenges hitting the oil sector, Chesapeake Energy Corporation (NYSE:CHK) recently told investors that it plans to slow down capital spending. One of the moves that the company intends to make is cutting its rig operations.
Amid widespread market and industry challenges, Chesapeake plans to cut its Ohio rig operations to a range of three to five in 2015 from eight in 2014. Additionally, the company intends to spend 37% less money on capital projects this year compared to the previous year. However, almost a quarter of capital allocation for 2015 will go into Utica operations where it only spent 10% of capital allocation last year.
According to Chesapeake Energy Corporation (NYSE:CHK) executives, their operations in Utica are very efficient. The company is able to drill wells in Utica at a cost of less than $7 million per well. However, the average cost of drilling a well for their competitors is about $9 million. That explains why even though the company has admitted that it does not occupy the core of the core in Utica, it sees great potential in the shale.