Chesapeake Energy Preview: Eagle Ford Oil Production Decline, Better Gas Prices Will Influence Results

Chesapeake Energy (NYSE:CHK), one of North America’s largest natural gas producers, is scheduled to release its Q4 2013 earnings on February 26. During the third quarter, the company’s quarterly production revenues grew by around 10% year-over-year to $1.59 billion, while net income came in at around $156 million compared to a loss during the previous year. For this quarter, we  expect the company’s results to improve on a year-over-year basis, although there could be a slight decrease in earnings sequentially. We believe that some of the key factors that will influence the company’s performance include lower oil production as well as a possibility of better natural gas volumes and price realizations. Here is a brief look at what we expect and what we will be watching when the company releases earnings.

We have a $25 price estimate for Chesapeake Energy, which is roughly in line with the current market price

See Our Complete Analysis For Chesapeake Energy Here

Temporary Production Slowdown In Eagle Ford Could Hurt Oil Volumes

Chesapeake’s liquids production growth has been the driving force behind the company’s performance over recent quarters. Oil production is more lucrative compared to natural gas and prices are also relatively less volatile. Over the first nine months of 2013, oil production volumes stood at roughly 30.9 million barrels, which is an increase of around 40% year-over-year. Much of this increase in volumes has come from the Eagle Ford shale, where production has been growing at roughly 44% CAGR over the last two years (see A Look At Chesapeake’s Operations In The Eagle Ford Shale). However, the company indicated that fourth quarter production could decline by roughly 9,000 barrels per day (around 7.5%) due to some weather related disruptions and infrastructure issues in the Eagle Ford shale, as well as due to the sale of some producing wells. ^[1] This is only seen as a temporary setback and volumes are likely to improve going into 2014. Additionally, we believe that oil price realizations on the company’s un-hedged oil volumes could also be slightly lower on a sequential basis, since WTI crude prices fell to levels of around $95 per barrel in Q4 from over $100 during Q3 2013.

Natural Gas Division Should Do Better

Chesapeake’s natural gas division saw its volumes drop by roughly 3% over the first nine months of 2013, ^[2] but we believe that things could improve during the fourth quarter. Natural gas consumption typically rises during the fourth quarter due to higher heating load. This winter has been particularly cold and during the month of November (the most recent data available), gas consumption grew by nearly 6% year-over-year. ^[3] This could result in higher natural gas sales for Chesapeake. Gas prices have been on the uptrend through 2013 and during the month of December, gas prices largely remained at above $4 per million British thermal units (MMBtu) compared to levels of under $3.5 in 2012. Although the company had indicated earlier in 2013 that about 79% of its natural gas production for the second half of the year was hedged, it could see better price realizations on its un-contracted volumes.

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1. Company Earnings Transcript, Seeking Alpha [↩]
2. Form 10-Q [↩]
3. Natural Gas Consumption By End Use, U.S. EIA [↩]