Chesapeake Energy (NYSE:CHK) is expected to release its Q1 2013 results on May 1. We expect the firm’s quarterly results to benefit from higher natural gas prices as well as growing oil and natural gas liquids production. During the last quarter, although Chesapeake’s revenues grew by nearly 30% year-over-year to $3.53 billion, net income declined to around $300 million from around $472 million due to weak price realizations for natural gas. Here are some of the key trends that we believe will drive the firm’s results for the quarter.
- 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?
Focus On Liquids Should Pay Off
Considering the volatility in gas prices over the past few years, Chesapeake has been focusing on boosting its oil and liquids production. Unlike natural gas prices which are primarily dependent on demand from North America, oil prices are linked to international prices and are relatively more stable. The firm’s liquids production growth has been commendable so far. During Q4 2012, overall liquids production per day stood at around 147,500 barrels, growing by 39% year-over-year while oil production grew by 69%. 
Production is expected to be strong through the Q1 as well. During its quarterly update conference call conducted in early April, the firm mentioned that liquids production touched an all-time high of around 160,000 barrels per day during Q1. The firm has hedged around 85% of its oil production for the year at around $ 95.45, and since crude prices are currently under $92 per barrel, the hedges should help the firm’s results.  Considering that Chesapeake expects to allocate around 86% of its drilling budget to liquids, up from around 46% in 2011, liquids production is only expected to rise further through the year. Based on Chesapeake’s estimates, it had around 70 rigs directed at liquids while there were less than 10 rigs directed at gas drilling through the first quarter.
Rising Gas Prices Will Help Results
Natural gas prices have increased by almost 20% over the last quarter, touching levels of around $4 per million British thermal units (MBtu) for the first time in nearly 18 months. The increase was largely due to the strong demand brought about by a prolonged winter, and there could be a reversal during the summer. However, we believe that it will have a positive impact on Chesapeake’s Q1 results. While the firm has projected that gas production for the year is expected to decrease by around 7%, it did mentioned that it was bringing about some additional price based production during Q1, to take advantage of the higher gas prices. 
While Chesapeake has hedged around half of its estimated gas production for the year at around $3.6 per mcf, it should be able to realize higher prices on the remaining portion of its natural gas production. (See Also: Drilling Into Chesapeake’s Natural Gas Hedging Program) This should have a significant impact on Chesapeake’s natural gas revenues on a sequential basis, since the company realized only around $2.07/Mcf of natural gas for Q4 2012, due to wrong-way hedges which caused nearly 75% of its gas production for that quarter to be sold at below market prices. 
Progress On Asset Sales And Debt Reduction Are Important
Chesapeake embarked on an asset monetization spree last year, closing asset sales of nearly $12 billion in 2012. This has helped to reduce long term debt from $15.7 billion in Q3 2012 to around $12.1 billion in Q4. The firm expects to be on track to divest an additional $4 to $7 billion in non-core assets this year as well and has already sold around $1.5 billion in assets year-to-date. However, the firm’s bargaining power in these deals has been quite weak and price realizations have been low. For instance, it sold some assets in the Mississippi Lime shale formation to China’s Sinopec for $2,400 per acre, well below the $7000+ that it had valued it at earlier. (Related Read: After Chesapeake Gives Sinopec A Sweetheart Deal Are More To Come?) We will be closely watching the firm’s progress in monetizing assets as well as realizing fair prices for them since it is quite imperative to shoring up its financial position.
The firm has been focusing on improving its capital efficiency, particularly for its drilling program, intending to bring down drilling and completion capital expenditures to around $6 billion for 2013, from around $8.8 billion last year. Chesapeake has been reducing the cost of drilling wells by using technologies such as pad drilling which speed up the drilling process and improve economies of scale. For instance, in the Eagle Ford shale, costs have reduced from around $9 million per well in the initial stages of the play to around $7 million currently, and the firm expects this to further improve to around $6 million.Notes: