Chesapeake Energy Preview: Natural Gas Volumes Could Decline, But Liquids Will Drive Results

Chesapeake Energy (NYSE:CHK)  will release its Q3 2013 earnings on November 6. We expect the company’s results to improve on a year-over-year basis, owing to higher oil production and price realizations, although natural gas volumes could decline slightly. In Q2 2013, the company’s revenues stood at around $4.67 billion, up 37% on a year-over-year  basis, while income from operations grew by about 58% to $1.17 billion. Here is a quick overview of what to expect and what we will be watching when the company releases earnings.

Trefis has a $24 price estimate for Chesapeake Energy which is around 15% below the current market price.

Natural Gas Volumes Could Decline, Although Pricing Will Be Better Than Last Year

Natural gas prices have risen by over 20% over the last year and this has had an impact on natural gas consumption across the United States, particularly for electricity generation. According to the U.S. Energy Information Administration, overall gas consumption in the month of July (the most recent data available), fell from around 66.9 billion cubic feet (bcf) per day in 2012 to around 61.6 Bcf per day in 2013. Mirroring these trends, Chesapeake expects its natural gas production for this year to decline by around 3% compared to the prior year to between 1,080 bcf and 1,100 bcf.  However, price realizations will be better than the last year. The company has downside hedged about 79% of its natural gas production for the second half of the year at around $3.7 per MMBtu (NYMEX) and this should help, since gas prices are currently trading at around $3.6 per MMBtu. ^[1]

Eagle Ford Production Should Continue To Drive Oil Volumes

We expect Chesapeake’s oil production to continue to remain strong given that over 80% of the firm’s drilling budget for 2013 is targeted towards liquids. During the last quarter, 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. ^[2] The company recently increased its oil production guidance for this year to between 38 million and 40 million barrels, citing stronger production from the Eagle Ford play. (Related: A Look At Chesapeake’s Operations in the Eagle Ford Shale) We see the boost in oil production as a very encouraging shift for Chesapeake since liquids are more profitable while their prices are less volatile when compared to natural gas prices. The company should see better price realizations for its oil production since WTI crude prices have largely remained above $100 per barrel over the third quarter which is at least 10% to 20% higher than the last year.

Watching For Cost Improvements

Chesapeake has made some strides in managing its costs and capital expenditures in the recent quarters. During the second quarter, the company brought down its average production expense to around $0.78 per thousand cubic feet equivalent (mcfe) from around $0.86 in Q1 2013 and around $0.97 in Q2 2012, thanks to higher volumes as well as lower costs related to saltwater disposal. Drilling efficiencies have also been improving as the company has been adopting technologies such as pad drilling. This has helped reduce spending on drilling and completion activities by close to 35% year-over-year as of the second quarter. We will be watching the company’s progress in making further improvements on the cost front.

Trefis will be updating its model and price estimate for Chesapeake Energy following the earnings release.

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1. Chesapeake Investor Presentation [↩]
2. Seeking Alpha [↩]