Chesapeake Energy (NYSE:CHK) will publish its Q1 2014 results on May 7. We expect the company’s earnings to rise on a year-over-year basis, driven by better liquids production and lower per-unit costs. During Q4 2013, production revenues were down by around 3% year-over-year to $1.61 billion, while adjusted net income grew by around 12% year-over-year to $161 million.  Below we present a brief look at some of the trends that could drive the company’s results for the quarter.
We have a $26 price estimate for Chesapeake Energy, which is about 10% below the current market price. We will be updating our price estimate for Chesapeake after the earnings release.
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Natural Gas Liquids Should Drive Volumes growth: For 2014, Chesapeake expects its overall production, adjusted for asset sales, to rise by around 8% to 10%. While oil production is expected to grow by 1% to 5% (production was 41.1 million barrels in 2013), natural gas production could remain flat or even fall by as much as 2%. Much of the volumes growth will come from natural gas liquids as the company plans to boost production of the commodity by as much as 45% this year. The higher production should come on better production from the Utica Shale, where the processing and transportation infrastructure has been improving (see A Look At Chesapeake’s NGL Production Guidance). This could prove a positive for the company, since demand and pricing for natural gas liquids have been trending upward.
Better Natural Gas Prices: The United States experienced colder than expected weather during the first quarter, with heavy snowfall in the north and central parts of the country, which resulted in higher natural gas consumption for residential and commercial heating purposes. This helped natural gas prices rise by nearly 30% over the last year, to levels of around $4.50 per MMBtu through much of Q1. We believe that Chesapeake could see better pricing on its natural gas production, although there are two caveats. Firstly, about two-thirds of the company’s production for this year is hedged, with upside of rates of around $4.18 to $4.38 per Mcf (NYMEX rates, not adjusted for differentials).  Secondly, the company will be recovering a greater percentage of ethane from its gas stream this year, which could potentially reduce price realizations for natural gas, while boosting natural gas liquids production. ((Key drivers affecting the gas prices Chesapeake Energy receives, Market Realist, February 2014))
Lower Per-Unit Costs: Chesapeake expects to make some significant progress on the cost front this year. Production expenses per barrel of oil equivalent (boe) are projected to fall by 5% to around $4.50 (midpoint of guidance). Some key drivers of these lower production costs include a shift to pad-based drilling as well as the company’s focus on drilling and producing from its most productive acreage such as the Eagle Ford shale and the Marcellus shale, where the rates of return are high. Pad drilling allows operators to drill multiple wells using a single rig and pads along which it can be moved. Pad drilling reduces drilling time and brings about economies of scale, since wells are located close to one another. The co-location of wells also helps to cut costs associated with gathering and transportation. Chesapeake has also guided that general and administrative expenses will decline to around $1.20 to $1.40 per boe, which would translate to a reduction of as much as 20% year-over-year. This improvement is likely to come on the back of better production volumes.Notes: