Chesapeake Energy (NYSE:CHK) delivered net earnings of $429 million in its recently announced Q4 2011 results, more than double its Q4 2010 net income of $180 million.  Much of this was driven by gains related to hedging activities, as well as the company’s focus on the natural gas and liquids segment and unconventional drilling methods. Chesapeake Energy is the second largest producer of natural gas in the U.S. behind ExxonMobil (NYSE:XOM). Below we take a look at the major trends during Q4 and for the rest of 2012.
Key highlights of Q4 and FY2011
- How Are Natural Gas Prices And The Global Gas Rig Count Correlated?
- How Are Crude Oil Prices And Global Oil Rig Count Correlated?
- How Will Chesapeake’s Revenue Change If Crude Oil Prices Rebound To $100 Per Barrel By 2018?
- How Will Chesapeake’s Revenue Change If Crude Oil Prices Average $50 Per Barrel In 2018?
- What Is Chesapeake Energy’s Revenue And EBITDA Breakdown?
- How Has Chesapeake’s Production Mix And Price Realization Changed Over The Last 5 Years?
The surge in Chesapeake’s profits for the quarter can largely be attributed to liquids production (oil and liquid natural gas), which increased by 76% over Q4 2010. Other items which impacted the results were gains on asset sales and hedging income, which was significantly higher than in Q4 2010. Excluding non-recurring items net income was still nearly $400 million. For the year as a whole, earnings dropped slightly from $1.66 billion in 2010 to $1.57 billion in 2011, but the company’s average daily production increased by 15% to 3.27 billion cubic feet of natural gas equivalent (bcfe).
Business strategies for 2012
Chesapeake has laid out much of its long-term business strategy. The company anticipates that in the long run, natural gas prices are going to decline which is why management is looking to balance its portfolio between natural gas production and liquids. Accordingly the company’s focus has shifted to oil and natural gas liquids production, as evidenced by the Q4 production surge. This has also resulted in a heightened emphasis on unconventional means of production as a way to give the company an edge if and when natural gas prices fall relative to liquids.
Additionally, the company is planning substantial asset sales this year in order to help close the expected funding shortfall related to its planned capital expenditures in 2012 and 2013.
Our current price estimate for Chesapeake Energy’s stock stands at $35, which is about 40% above the current market price. We believe this premium can be largely attributed to investor concerns related to the company’s capital expenditure-related funding shortfall. We are in the process of revisiting our forecasts for the company to incorporate Q4 results and 2012 outlook.Notes: