Chesapeake Results Show Improvements On Higher Oil Production
- Quick Take
- Chesapeake reported encouraging Q1 numbers with revenues growing by around 41% year-over-year and adjusted net income rising by 94% to $183 million.
- Oil sales were the primary driver of the results with oil volumes growing by over 50% y-o-y. Natural gas remained lackluster with relatively flat volumes and slightly lower prices compared to last year.
- Operational improvements look encouraging with production costs down nearly 18% y-o-y. Key near-term priorities for the firm include realizing asset sales at fair prices and paying down debt.
Chesapeake Energy (NYSE:CHK) reported its Q1 2013 results on May 1, displaying a relatively strong set of numbers. Quarterly revenues were up by around 41% year-over-year to $3.42 billion while adjusted net income increased by 94% to $183 million. [1] The improved performance was attributable to higher oil production, lower production costs as well as better operational efficiencies. However, the firm’s biggest issue continues to be its large debt load and this has been quite concerning since price realizations for asset sales have been quite low. Here are some of the key observations from the earnings release and what they could imply for Chesapeake going ahead.
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The Focus On Oils Is Paying Off
Chesapeake’s total production for the quarter stood at 358 bcfe up by around 8% over last year. While natural gas production was relatively flat year-over-year at around 273 bcf, realized prices were down by around 9% year-over-year to around $2.13/mcf although they were up by around 3% on a sequential basis. The liquids production growth continued to see a positive trend. Oil production grew by around 54% since the same quarter last year to 9.3 million barrels, and price realizations were also relatively strong at nearly $95 per barrel. Natural gas liquids production also grew by around 12% to 4.9 million barrels. Revenues from oil production now account for almost three times Chesapeake’s natural gas revenues (accounting for hedging effects), and we think that this is a very encouraging shift for the firm. Unlike gas prices which are primarily dependent on demand from North America, oil prices are linked to international prices and are comparatively more stable. We believe that this is the right shift for the company since what it needs more than anything right now are stable cash flows.
Considering that Chesapeake expects to allocate over 80% of its drilling budget for this year to liquids up from around 46% in 2011, oil production is only expected to rise further. The firm increased its oil production guidance for 2013 to 37 – 39 million barrels which is at least 20% above last year’s levels. Since most of the production is hedged at around $95 per barrel, it should help boost overall revenues for the year as well.
Cost Improvements Encouraging But Asset Sales And Debt Reduction Are Key
The firm continued to make good progress operationally with production costs for the quarter coming in at around $0.86 per mcfe, down by around 18% from a year ago period while general and administrative expenses were also down by 29% to around $0.25 per mcfe. The firm has also been focusing on improving its capital efficiency, particularly for its drilling program. It said that it was sticking to its $6 billion CapEx guidance figure for 2013, which is around $2.8 billion lower than last year’s capital expenditure.
Chesapeake has been reducing the cost of drilling wells by using technologies such as pad drilling that speed up the drilling process and improve economies of scale. Overall drilling efficiencies have been improving, and in the Eagle Ford shale for instance, well costs have reduced from around $9 million per well in the initial stages of the play to around $7 million currently. Chesapeake expects this to further improve to around $6.5 million. [2]
Chesapeake’s highly leveraged balance sheet remains a significant concern. In Q1, long-term debt increased to around $13.5 billion since the firm incurred $1.5 billion in well costs for the quarter. Although the cash position deteriorated to just $33 million, the company does have a revolving credit facility of around $3.2 billion so liquidity shouldn’t be an issue in the near term.
Through the first quarter, Chesapeake signed or closed asset sales of around $2 billion and has a target of divesting between $4 billion and $7 billion in assets for this year. In February, it entered into a deal to sell some of its acreage in the Mississippi Lime formation to China’s Sinopec and more recently, it announced that it will be selling its Mid-America Midstream Gas Services subsidiary in the same play for around $300 million. [3] However, price realizations on some of the asset sales appear to have been quite weak. For instance, the Sinopec deal was estimated to have been closed for around $2,400 per acre which is well below the $7,000+ that the company had valued it at earlier.
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