Chesapeake Energy's diligent restructuring work is finally
paying off. The oil and gas producer has logged three quarters of
high earnings growth, into the triple digits, and four quarters
of solid double-digit sales growth.
This year marks a big turnaround from a string of poor
earnings growth. The Oklahoma City-based firm earned 43 cents a
share in its third quarter, up 330% from a year earlier and on
par with Wall Street expectations. It took in $4.87 billion in
revenue, up 64% and topping the $3.84 billion that analysts
polled by Thomson Reuters anticipated.
Much of Chesapeake's financial progress in 2013 is
attributable to its repositioning of focus more on oil than on
natural gas, a big change in management and a strategy of selling
off noncore assets.
In the third quarter its net daily oil production lifted 23%
from a year earlier to 120,000 barrels and natural gas liquids
rose 31%, as natural gas production decreased 10%.
"It's a pretty extensive restructuring story," said James
Sullivan, analyst at Alembic Global Advisors. "They went through
a management change and a significant shift in terms of spending
Fuel And Efficiency
Chesapeake is the second largest U.S. natural gas producer and
11th largest U.S. liquid fuels producer. The company owns an
interest in 45,900 producing natural gas and oil wells with a net
production of about 4.1 billion of cubic feet equivalent (BCFE)
per day, 75% of which is natural gas.
The company has significantly cut its number of assets.
Chesapeake's capital expenditures, especially to do with
leasehold inventory spending, dropped almost 60% in a two-quarter
span, Sullivan noted ahead of the third quarter report.
"They've exited almost entirely the midstream business now,
which was a very large part of what they had; multiple billions
of dollars worth of sales in that," he said. "They've exited the
Permian Basin ... and they've thinned out positions in certain
areas, in the Eagle Ford and elsewhere in the Utica."
Chesapeake also made Doug Lawler its new CEO and a board
member. There since June, Lawler has spent 25 years in the
upstream E&P industry. He comes fromAnadarko Petroleum (
), the No. 2 firm by market cap in IBD's Oil & Gas-U.S.
Exploration & Production industry group afterEOG Resources (
"Lawler has been in the midst of sorting through the
organization, making some early changes," said analyst Joe Magner
of Macquarie Research. "He's provided some high-level thoughts
about what he hopes to be able to accomplish and where he hopes
to be able to get Chesapeake long term."
That is, for the firm to "be more self-dependent" and not
necessarily "reliant on asset sales" to fund development of
acreage core to the firm's strategy and growth plans.
It is No. 7 in its group by market cap, after EOG,
Anadarko,Noble Energy (
),Pioneer Natural Resources (
),Devon Energy (
) andContinental Resources (CLR).
Last year, when Chesapeake was desperately trying to fill its
cash flow shortage, it had to work through a fire sale of some of
its assets. This year, the sales have been made in a more paced
way and at better prices. In July, it sold its Northern Eagle
Ford Shale and Haynesville Shale stake for $1 billion. It also
sold its 50% stake in the Mississippi Lime joint venture with
Sinopec International Petroleum Exploration and Production for $1
billion in cash.
Chesapeake also made some internal changes to keep
administrative costs under control. So far this year, about 1,200
jobs have been cut.
Restructuring Under Way
The company ran an average 81 rigs in the first half of 2013.
With the restructuring it trimmed the rig count to 67 in the
third quarter and forecasts 59 for the fourth quarter.
In the third quarter, Chesapeake invested about $1.2 billion
in drilling and completion activities, $350 million less than in
the second. It finished 321 wells, down from 410.
With a forecast 14% reduction in gross wells completed in the
fourth quarter vs. the third, Chesapeake sees its drilling and
completion costs coming in lower for 2013 than it previously
anticipated, the company said in its third quarter report. It
gave a range of $5.5 billion to $5.8 billion, down from its prior
view of $5.7 billion to $6 billion.
This year Chesapeake has worked Texas natural gas shale plays
(Barnett, Bossier and Haynesville) and the Marcellus Shale in the
Northeast. In unconventional liquids it has worked the Anadarko
Basin, Eagle Ford Shale, Mississippi Lime, Niobrara Shale and
"Because of the magnitude of acreage that the company had
acquired and the need to drill that acreage in order to hold on
to it, the operations have not been very streamlined. They've
been drilling wells spread out over big areas in Marcellus and
Eagle Ford," said Magner.
"So as they looked to gain efficiencies and improve the
productivity of that program, they're talking more of
concentrated development off of pads, similar to what a lot of
other E&P companies are talking about," he said. This should
enable the company to drill more wells in certain areas and save
on the cost of moving rigs, equipment and crews around.
Magner says that the Eagle Ford and Marcellus are areas where
the firm hopes to gain such operational efficiencies. "They're
arguing that the acreage that they have should be more productive
than what they've seen as they move into that mode of
development," he said. "But they haven't really been able to
exhibit what that's going to look like."
The company has been able to cover the funding gap this year,
but analysts think that it probably will outspend cash flows next
year, with a much smaller size of operations.
Then "they can start to think about how they shape what they
want to be -- but they're going to be smaller," said Sullivan.
"We are cautiously optimistic that Lawler is going to be able to
put into place a strategy that's much more disciplined going
forward, in terms of investment but also trying to balance cash
flow and their capex needs."
Many pieces still must "fall into place," Sullivan said. "Is
it going to be possible that they can improve the performance of
the assets and be able to spend less money?"