Chesapeake Energy 2Q Preview: Lower Prices, Production To Weigh On Results

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Chesapeake Energy

Chesapeake Energy (NYSE:CHK) is scheduled to announce its 2015 second-quarter earnings on August 5. We expect lower price realizations to weigh significantly on the company’s financial results. Chesapeake’s net hydrocarbon production is comprised of 73% natural gas and 27% liquids (crude oil and natural gas liquids). Benchmark crude oil prices have fallen sharply over the past 12 months on rising supplies amid slower demand growth. The average WTI crude oil spot price declined by more than $45 per barrel or 44% year-on-year during the second quarter. In addition, the average Henry Hub natural gas spot price also declined by $1.86 or 40.4% y-o-y during the quarter. Apart from lower price realizations, we expect Chesapeake’s second-quarter earnings to also fall as a result of lower net production, primarily driven by recent divestitures, curtailments, and higher project downtime. However, hedging gains and productivity improvements are expected to partially offset the impact of lower benchmark prices and net production on the company’s overall performance.

Chesapeake is the 2nd-largest producer of natural gas and the 11th-largest producer of liquids (crude oil and natural gas liquids) in the United States. The company’s operations are focused on discovering and developing unconventional natural gas and crude oil fields onshore in the U.S. It owns positions in the Barnett, Fayetteville, Haynesville, Marcellus, and Bossier natural gas shale plays, and in the Eagle Ford, Granite Wash, Niobrara, and various other conventional and unconventional liquid-rich plays across the U.S. The firm has interests in over 45,100 natural gas and crude oil wells that produce approximately 729 thousand barrels of oil equivalent per day (MBOED), net to Chesapeake. At the end of 2014, Chesapeake’s proved hydrocarbon reserves stood at almost 2.47 billion barrels of oil equivalent, with 75.5% of these reserves categorized as proved developed. We currently have a $14 per share price estimate for Chesapeake, which is around 70% above its current market price. [1]

See Our Complete Analysis For Chesapeake Energy

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Lower Net Production

Chesapeake’s net hydrocarbon production is expected to decline year-on-year during the second quarter. This is primarily because of the impact of recent divestitures completed by the company to enhance its liquidity and reduce the debt burden. Last year, Chesapeake sold certain assets in the southern Marcellus Shale, and a portion of the eastern Utica Shale, to a subsidiary of Southwestern Energy Company for aggregate net proceeds of approximately $4.975 billion. The company sold approximately 413,000 net acres of property and approximately 1,500 wells in northern West Virginia and southern Pennsylvania, of which 435 wells were in the Marcellus or Utica formations, along with related gathering assets and property, plant, and equipment. This is expected to reduce the company’s net oil and gas production by about 50 MBOED y-o-y. [2]

In addition, Chesapeake also began the curtailment of its net operated production in the Marcellus shale during the fourth quarter last year, primarily because of low in-basin field prices. This lowered its net hydrocarbon production by around 15 MBOED in 4Q 2014 and continued to weigh on the company’s net production during the first quarter as well. During the most recent earnings conference call, Chesapeake’s management mentioned that they doubled the curtailment level to 500 million cubic feet of gas per day, gross, which could pull down the company’s 2Q net production by about 30 MBOED, by our estimates. However, for the full year, Chesapeake currently expects its net production, adjusted for the impact of recent divestitures, to grow by around 1-3% despite the sharp cut in drilling activity, primarily because of drilling efficiency improvements implemented over the last couple of years and the expected deflation in service costs during the second half of the year. [3]

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Notes:
  1. Chesapeake 2014 10-K, sec.gov []
  2. Chesapeake Q4 2014 Earnings Call Transcript, chk.com []
  3. Chesapeake Q1 2015 Earnings Call Presentation, chk.com []