Chesapeake Energy Q3 Results Driven By Oil Production Growth And Lower Production Expenses

Chesapeake Energy (NYSE:CHK) reported a relatively good set of third quarter earnings on November 6, meeting market expectations. The numbers were bolstered by robust oil volumes, lower per-unit production expenses as well as  slightly higher price realizations for oil and natural gas. While the company’s quarterly production revenues grew by around 10% year-over-year to $1.59 billion, net income came in at around $156 million compared to a loss of over $2 billion last year when the company recorded significant impairment charges. ^[1] Below is a brief overview of some of the trends underlying the company’s earnings and what to expect from Chesapeake Energy in the near term.

Trefis has a $24 price estimate for Chesapeake Energy,which is roughly 10% below the current market price.

Oil Production  Growth Drive Results, But Volumes Expected To Dip In Q4

Chesapeake’s oil production for the quarter grew to around 11 million barrels (about 120,000 barrels per day)  from around 9 million barrels during the same period last year, driven by strong production from the Eagle Ford shale (related: A look at Chesapeake’s operation in the Eagle Ford shale). Oil price realizations were also slightly higher compared to last year at around $92 per barrel. The company has been focusing on liquids (oil and natural gas liquids) of late, since it is more lucrative, with prices being relatively less volatile compared to natural gas.

However, the company expects oil production in the fourth quarter to decline by roughly 9,000 barrels per day (7.5% sequential decline), ending a streak of increases, due to weather related disruptions in the Eagle Ford shale as well as the sale of some producing wells. Considering that liquids production has become the company’s focus (accounting for about 65% of total revenues) the projected decline in Q4 oil production spooked investors, sending Chesapeake’s stock down by close to 7% in Wednesday’s trading. However, the company has noted that this would only be a “brief pause” in oil production growth, and has indicated that it expects oil production to continue its sequential organic growth from 2014. ^[2] The company will be providing its detailed production guidance for 2014 early next year.

Production Costs And Capital Efficiency Continue To Improve

Chesapeake has made substantial progress in managing its costs and capital expenditures this year. During the third quarter, the company brought down its average production expenses to around $0.76 per thousand cubic feet equivalent (mcfe) from about $0.84 per mcfe in Q3 2012 and $0.78 per mcfe in Q2 2013 despite its increasing focus on liquids. However, the company sees some upward pressure in these expenses going into next year as it expects to incurs costs towards optimizing its production operations.

Chesapeake  has been focusing on improving its capital efficiency as well, aiming to balance its capital expenditures with operating cash flows by allocating more capital to its most promising plays and drilling in core areas of these plays where the rates of returns are the best. Drilling efficiencies have also been improving as the company has been adopting technologies such as pad drilling to cut down on drilling cycle times and costs. For the third quarter, total capex stood at around $1.50 billion, a 57% reduction compared to last year. This was only slightly above the company’s quarterly operating cash flows of around $1.40 billion. ^[3]

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

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1. Chesapeake Earnings Press Release [↩]
2. Seeking Alpha [↩]
3. Chesapeake Investor Presentation [↩]