Source: Chesapeake Energy Corporation.
its second-quarter results on Aug. 6. The Oklahoma-based
independent oil and gas
producer reported a profit of just $191 million, or $0.22 per
share, which was 67% below last year's second quarter. Adjusted
net income of $0.36 per share was down 29% from last year and
below the $0.44 per share that analysts expected.
Why the miss?
Operationally, Chesapeake Energy had a pretty solid quarter.
Production, adjusted for asset sales, was up 13% over last year's
second quarter. Meanwhile, higher-margin oil production rose 12%
year over year. Furthermore, the company's expenses were lower on
a barrel of oil equivalent basis from last year's second quarter:
Production expenses were down 5%, G&A expenses dropped 17%,
and capital spending fell 27%.
The problem is that the prices Chesapeake realized for oil,
natural gas liquids, and natural gas were also lower in the
quarter, as indicated on the following chart.
Source: Chesapeake Energy's Second-Quarter Results Press
What's interesting is that Chesapeake Energy was largely alone
in experiencing weaker commodity price realizations for the
quarter. Check out the following chart of some of Chesapeake
Energy's closest peers.
Source: Company Press Releases.
As that chart illustrates,
Pioneer Natural Resources
both enjoyed much higher realized
than Chesapeake Energy. While
's realized oil prices were lower, that involved an unhappy
situation in Canada, where Devon Energy realized just $65.28 per
barrel even as its U.S. oil production realized $91.54 per
The price realization difference was even greater when it came
to natural gas. Chesapeake Energy, which is still America's
second-largest gas producer, only realized $2.45 per Mcf this
quarter, well below the more than $4 per Mcf realized by its
peers. Chesapeake's natural gas liquids price realizations were
also much lower than its peers, which really hurt as the
company's NGL production surged 72% over last year's second
Chesapeake Energy was bitten by its oil and gas hedges in the
quarter. While those hedges smooth out volatility, that works
both ways as the company isn't able to earn as much when oil and
gas prices head higher. It's a risk Chesapeake has chosen to
manage by using more hedges than many of its peers.
Slowly making progress
Chesapeake Energy can only do so much to control its exposure to
commodity prices. That's why the company is focusing most of its
attention on areas it can control: costs and production. The
company did a good job keeping a lid on costs in the second
quarter and plans to continue to reduce expenses wherever
possible. Meanwhile, production continues to grow; Chesapeake
even raised the midpoint of its 2014 production guidance by 1.5%.
This is slow and steady progress that will make a difference over
the long term.
Commodity prices will always have an impact on Chesapeake Energy.
While its hedging practices do put a lid on profits, it's a risk
the company is willing to take to protect itself from a real
plunge in prices. That said, the tables could someday turn, and
the company's rivals will realize weaker commodity prices while
Chesapeake Energy is rewarded for taking on less risk.
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Chesapeake Energy Corporation Earnings: Why It
Missed While Others Thrived
originally appeared on Fool.com.
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