Chesapeake Beats on Stronger Prices – Analyst Blog

Chesapeake Energy Corporation (CHK) reported sharper-than-expected first quarter results of 82 cents per share, compared with the Zacks Consensus Estimate of 70 cents and the year-earlier quarter earnings of 46 cents. Despite a lower production volume, earnings came in above our expectations due to a more than 5% increase in overall price realization.

 

 

Chesapeake’s average daily production for the quarter increased 9% year over year but decreased 1% sequentially to 2.59 billion cubic feet equivalent (Bcfe), of which natural gas was 90%. Taking into account the company’s production curtailments, Chesapeake’s year over year and sequential production growth rates were 19% and 5%, respectively.

 

The company is guiding towards full-year production growth of approximately 8%−10% in 2010 and 16%−18% in 2011. Although the company’s production profile is fairly natural gas weighted, it is planning to increase its liquids production to 15%−20% of total production through organic means by the end of 2012.

 

Natural gas equivalent realized price in the reported quarter was $6.80 per thousand cubic feet (Mcfe) versus $6.09 in the year-earlier quarter and $6.45 in the previous quarter. Average realizations for natural gas were $6.31 per Mcf, compared with $6.05 per Mcf in the year-earlier as well as the previous quarter. Realizations came to $67.70 per barrel of oil, compared with $39.12 per barrel in the year-ago quarter and $71.61 per barrel in the previous quarter.

 

On the cost front, production expenses reduced 20.5% from the year-earlier level but increased 3.5% from the previous quarter to 89 cents per Mcfe. Cash flow from operations increased 16.7% year over year and decreased nearly 4% to $1.2 billion.

 

At the end of the quarter, Chesapeake had a cash balance of $516 million. Debt balance stood at $12.2 billion at the end of the reported quarter, representing a debt-to-capitalization ratio of 50%.

 

 

We appreciate Chesapeake’s initiative of deploying more funds towards liquids. In the current scenario of an uptrend in oil prices, the company is planning to deploy more capital to drill liquids-rich plays, particularly Granite Wash, Eagle Ford Shale, Anadarko Basin, Permian Basin and Rocky Mountain unconventional liquids-rich plays. On this basis, it has raised its liquids-to-total production target ratio to 15−20% from 10% currently.

 

Following the joint venture (JV) with Total (TOT) for the development of Barnett Shale assets, Chesapeake is stepping ahead for more JVs for its shale properties. Recently, the company also sold its non-core properties in the Permian and the Appalachian basins. We believe that creating JVs, monetizing of assets and increased focus on liquids will boost returns.