Natural gas provider,
Chesapeake Energy Corp.
) 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.
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
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
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
), 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
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
CHESAPEAKE ENGY (
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