Chesapeake Earnings Preview: Lower Natural Gas And NGL Prices Could Dampen Results

-98.08%
Downside
88.85
Market
1.70
Trefis
CHK: Chesapeake Energy logo
CHK
Chesapeake Energy

Chesapeake Energy (NYSE:CHK) will publish its Q2 2014 results on August 6. We expect the company’s earnings to fall on a year-over-year basis, driven by lower natural gas and natural gas liquids price realization. The impact of lower prices could be offset somewhat by the movement of higher volumes and realization of efficiencies in the company’s cost structure. During Q1 2014, quarterly production revenues were up by around 21% year-over-year to $1.76 billion, adjusted net income nearly doubled to $456 million [1]. Below we present a brief look at some of the trends that could drive the company’s results for the quarter.

See our complete analysis for Chesapeake Energy here

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.

Relevant Articles
  1. Will Chesapeake See Improved Results In 2019?
  2. Higher Oil Output And Better Pricing To Drive Chesapeake’s 3Q’18 Results
  3. Factors That Will Drive Chesapeake Energy’s Value In The Next Two Years
  4. Chesapeake Q2 Earnings Preview: Commodity Price Strength and Operational Efficiency To Drive Growth
  5. What Factor Is Driving Chesapeake’s Stock Rally?
  6. Key Takeaways From Chesapeake’s Q1

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.

Lower than Expected Natural Gas and Natural Gas Liquids Price Realization: Cheseapeake issued a press release recently saying that price realizations of natural gas and natural gas liquid volumes were lower than expected. According to the press release, about 30% of CHK’s natural gas production over the quarter came from the Marcellus North region. For the second quarter, Chesapeake’s realized natural gas price on its Marcellus North natural gas production is expected to average $2.47 per Million cubic feet(Mcf) below Henry Hub (the most commonly used metric for natural gas spot prices is the “Henry Hub”), compared to an average discount of $0.18/Mcf that the it received for its Marcellus North production during the Q1. [2] The press release also announced a significant drop in Natural Gas Liquids(NGL) price realizations. CHK’s average realized price per barrel of NGL during Q2 is expected to be $21.03, compared to an average realized price per barrel of $29.23 during Q1, implying a 28% decline. The company attributed the decline to  low ethane prices and reduced seasonal demand for propane and butane. [3]

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.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology

Notes:
  1. Q1 2014 Earnings Press Release, Chesapeake Energy, May 2014 []
  2. Chesapeake Energy Corporation Announces Transactions Increasing Exposure to Powder River Basin Oil Growth and Reducing Balance Sheet Complexity; Company Provides Update on 2014 Second Quarter Commodity Price Realizations, Seeking Alpha, July 2014 []
  3. Chesapeake Energy Corporation Announces Transactions Increasing Exposure to Powder River Basin Oil Growth and Reducing Balance Sheet Complexity; Company Provides Update on 2014 Second Quarter Commodity Price Realizations, Seeking Alpha, July 2014 []