Chesapeake Energy Corporation (CHK) reported better-than-expected fourth quarter results driven by strong production volumes and reduced costs. Quarterly earnings were 77 cents per share, compared to the Zacks Consensus Estimate of 69 cents and year-earlier quarter earnings of 75 cents. Before adjusting for one-time items, its loss per share was 84 cents.
Estimate Revisions Trend
With improving production numbers, we see a positive trend in estimate revisions. For the last 30 days, 9 of the 29 analysts covering the stock raised estimates for fiscal 2010 while 3 analysts moved in the opposite direction. No up or downside movements occurred in the last 7 days.
Currently, the Zacks Consensus Estimate for fiscal 2010 earnings is $2.56 per share, which is a penny above fiscal 2009 earnings.
The company’s earnings surprise for the preceding four quarters varies between a negative 8.0% and a positive 24.0%, with the average being a positive 4.5%.
Operational Performance
Chesapeake’s average daily production for the quarter increased 13% year-over-year and more than 5% sequentially to 2.62 billion cubic feet equivalent (Bcfe), of which natural gas was 93%. Taking into account the company’s production curtailments and divestitures, Chesapeake’s year-over-year and sequential production growth rates were 17% and 5%, respectively.
Average realizations for the quarter were $6.05 per thousand cubic feet (Mcf) for natural gas, compared to $6.04 per Mcf in the previous quarter and $7.13 per Mcf in the year-earlier quarter. Realizations came to $71.61 per barrel of oil, compared to $66.42 per barrel in the previous quarter and $54.80 per barrel in the year-ago quarter. Per Mcfe production expenses were significantly reduced to 86 cents, compared to $1.09 in the year-ago quarter.
Year-end 2009 Reserves
At the end of 2009, Chesapeake had proved reserves of approximately 14.3 (using SEC pricing) trillion cubic feet equivalent (Tcfe), an increase of 18% from the end of 2008. Chesapeake delivered a 2009 full-year reserve replacement ratio and drilling and net acquisition cost of 343% and $0.74 per Mcfe, respectively.
Liquidity
Operating cash flows in the reported quarter was up 15% to $1.2 billion. At the end of the quarter, Chesapeake had a cash balance of $307 million and a debt-to-capitalization ratio of 49.9%, compared to 48.5% as of September 30, 2009.
Outlook
The company is expected to post 8%–10% volume growth in 2010 and 15%–17% in 2011, reflecting the quality of its asset base. We believe that production growth will remain at or near the top of its large-cap peer group, particularly in the light of continued strong drilling results from its shale plays.
Chesapeake has perhaps been the industry’s most active player in managing its asset portfolio through a combination of acquisitions and disposals. Given its solid growth profile, competitive cost structure and management’s track record of out-performance, Chesapeake is advantageously placed compared to many of its peers in the E&P space. However, we are currently Neutral on the company to show our concern about the company’s natural gas weighted production and reserve base.
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