Chesapeake Q2: Higher Natural Gas Prices And Oil Production Help Results

Chesapeake Energy (NYSE:CHK) released its Q2 2013 earnings on August 1, showing a relatively good set of numbers that were aided by strong oil production and better price realizations for natural gas. This was also the firm’s first quarterly earnings release since the new CEO Robert Douglas Lawler took over. While revenues were around 37% higher year-over-year reaching $4.67 billion, income from operations grew to around $1.17 billion from around $738 million last year. ^[1] Here is a quick rundown of some of the key trends from the company’s earnings release.

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Oil Production Continues To Grow, Outlook For The Year Improves

The company’s oil production grew by around 43% year-over-year and 13% sequentially to over 10,500 thousand barrels (mbbls) as production from the Eagle ford shale play soared. We see the boost in oil production as a very encouraging shift for the company since oil prices are less volatile when compared to natural gas prices. Oil price realizations were also slightly higher than last year at around $93.80 per barrel. The company also upped its oil production guidance for the year to between 38,000 and 40,000 mbbls, and we believe that production could increase further going forward as Chesapeake expects to allocate most of its drilling budget for 2013 towards liquids.

Natural Gas Business Aided By Better Price Realizations

While natural gas production has held largely flat over the last year at around 278 billion cubic feet (bcf), price realization for the quarter grew to around $2.62 per thousand cubic feet (mcf) from around $2.13 per mcf in the previous quarter and $1.88 per mcf last year. Although Chesapeake is now predominantly an oil company in terms of revenue, we believe that the natural gas division holds significant long term potential given that it is much cleaner and currently more economical compared to coal. For instance, since carbon dioxide emissions for natural gas-fired power plants are about half those of coal, it might be easier and more cost effective for electric utility companies to meet new environment standards by transitioning to gas rather than upgrading their ageing coal facilities. (Related Read: How Obama’s Climate Action Plan Impacts The Energy Sector) Since Chesapeake is America’s second largest gas producer with among the largest acreage in the country, it could benefit from a potential increase in gas consumption.

Costs Come Under Control

The company’s average production expenses during the quarter were $0.78 per thousand cubic feet of natural gas equivalent (mcfe), around 20% lower than last year, thanks in part to lower saltwater disposal costs. ^[2] Capital discipline has also improved considerably with spending on drilling and completion activities coming in at just about $1.6 billion, down by around 35% year-over-year. Drilling efficiencies have also been improving as the company has been adopting technologies like pad drilling. In the Eagle ford shale for instance, spud-to-spud cycle times have decreased from around 21 days last year to about 16 days currently while cycle times in the Utica shale have decreased from around 26 days to around 18 days. The firm’s spending on leasehold and other capital expenditures is also under control falling by over 75% since last year to around $245 million. ^[2] The company’s new CEO is undertaking a comprehensive review of the company’s assets and has emphasized that one of the key focus areas for the company will be to balance capital expenditures with cash flows from operations.

We have increased our price estimate for Chesapeake Energy from around $20 to about $24, which is almost in line with the current market price. Our price revision reflects the company’s rising oil production and better price realization for natural gas.

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1. Chesapeake Press Release [↩]
2. Seeking Alpha [↩] [↩]