Chesapeake Lags Consensus - Analyst Blog


Natural gas provider, Chesapeake Energy Corp. ( CHK ) has reported adjusted fourth quarter 2011 earnings of 58 cents per share, missing the Zacks Consensus Estimate by a penny. The reported figure also showed a decline from the year-earlier profit of 70 cents. The underperformance came on the back of a nearly 26% decline in average price realizations for natural gas.

Full-year 2011 adjusted earnings declined more than 5% to $2.80 per share from last year's profit level of $2.95. The full-year earnings also missed the Zacks Consensus Estimate by a penny.

Total revenue increased 38% year over year to $2,727 million in the fourth quarter from $1,975 million in the comparable quarter last year. However, total revenue missed the Zacks Consensus Estimate of $3,082 million.

Full-year 2011 total revenue increased more than 24% to $11,635 million from the year-earlier level of $9,366 million but failed to match up to our expectation of $12,072 million.

Operational Performance

Chesapeake's average daily production in the quarter increased more than 23% year over year to 3,596 million cubic feet equivalent (MMcfe), of which natural gas accounted for 82%. The percentage of natural gas production to total volume decreased 7% on an annualized basis. However, natural gas production grew marginally to 2,959 million cubic feet (Mcf) from 2,558 Mcf, while oil production expanded 76% from the year-ago level.

Natural gas equivalent realized price in the reported quarter was $5.08 per thousand cubic feet equivalent (Mcfe) versus $5.87 in the year-earlier quarter. Average realizations for natural gas were $3.87 per Mcf compared with $5.22 per Mcf in the year-earlier quarter. Liquids were sold at $64.12 per barrel, up from the year-ago price level of $62.62 per barrel.

On the cost front, production expenses decreased more than 2% from the year-earlier level to 88 cents per Mcfe.


At the end of the quarter, Chesapeake had a cash balance of $351 million. Debt balance stood at $10,626 million, representing a debt-to-capitalization ratio of 39.0% (versus 41.9% in the preceding quarter). Operating cash flow decreased 4.3% year over year to $1,311 million.


Chesapeake expects its 2012 as well as 2013 total production approximately in the range of 1,268-1,332 Bcfe and 1,464-1,528 Bcfe, respectively.

For 2012 and 2013, liquids production forecast range is 53-57 million barrels (MMBbls) and 74-78 MMBbls, respectively. Chesapeake expects its natural gas production in the bands of 950-990 Bcf and 1,020-1,060 Bcf for 2012 and 2013, respectively.

We believe that production growth will remain at or near the top of its large-cap peer group, particularly in light of continued strong drilling results from its shale plays.


We appreciate Chesapeake's initiative of deploying more funds toward liquids. The company has grown rapidly and now ranks as the second-largest producer of natural gas. Since 2000, the company has created the largest combined inventories of onshore leasehold of about 15.3 million net acres in the U.S.

It also holds a leading position in 11 of the top 15 unconventional liquids-rich plays in the U.S. -- the Granite Wash, Cleveland, Tonkawa and Mississippi Lime plays in the Anadarko Basin; the Avalon, Bone Spring, Wolfcamp and Wolfberry plays in the Permian Basin; the Eagle Ford Shale in South Texas; the Niobrara Shale in the Powder River Basin and the Utica Shale in the Appalachian Basin.

In our opinion, Chesapeake is one of the most active players in the industry to manage its asset portfolio through a combination of acquisitions and disposals. In a separate press release, the company revealed its plan to fill the funding gap for its 2012 expenditure that resulted from low natural gas prices, through divestitures. The company plans to raise as much as $10 billion to $12 billion from assets sales and joint ventures to cope with the mounting debt level and sinking gas prices. Chesapeake, like its peer ConocoPhillips ( COP ), has been keeping gas production under check in response to the weak natural gas prices.

Consequently, Chesapeake announced the curtailment of its daily gas production by 500 Mcf. The company plans to double that amount to cut its spending.

Chesapeake expects to receive $6-$8 billion in 2012 from the monetization of its assets for its West Texas Permian Basin and Mississippi Lime acreage in northern Oklahoma. The company expects the deal to close by the end of the third quarter of the current fiscal year.

We think Chesapeake's focus on shale gas plays should provide the impetus to monetize these assets more effectively. This, coupled with the company's concentration on liquids will boost returns. However, since natural gas accounted for about 82% of Chesapeake's production in the quarter and as near-term speculations of challenging natural gas fundamentals remain, we are apprehensive that the company's results will be vulnerable to fluctuations in the relevant markets. Hence, we believe that the stock will perform in line with the group and maintain our long-term Neutral recommendation for Chesapeake.

The company retains a Zacks #3 Rank (short-term Hold rating).

CHESAPEAKE ENGY ( CHK ): Free Stock Analysis Report
CONOCOPHILLIPS ( COP ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: CHK , COP

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