Natural gas provider,
Chesapeake Energy Corp.
) reported adjusted first quarter 2012 earnings of 18 cents per
share, missing the Zacks Consensus Estimate of 29 cents. The
reported figure also declined significantly from the year-earlier
profit of 75 cents a share. The underperformance came on the heels
of a nearly 56% decline in average price realizations for natural
Total revenue increased 50% year over year to $2,419 million in
the first quarter from $1,612 million in the comparable quarter
last year. However, total revenue missed the Zacks Consensus
Estimate of $2,752 million.
Chesapeake's average daily production in the quarter increased
nearly 18% year over year to 3,658 million cubic feet equivalent
(MMcfe), of which natural gas accounted for 81%. The percentage of
natural gas production to total volume decreased 6% points on an
annualized basis. However, natural gas production grew marginally
to 2,976 million cubic feet (Mcf) from 2,433 Mcf, while oil
production expanded 69% from the year-ago level.
Natural gas equivalent realized price in the reported quarter
was $4.02 per thousand cubic feet equivalent (Mcfe) versus $5.99 in
the year-earlier quarter. Average realizations for natural gas were
$2.35 per Mcf compared with $5.31 per Mcf in the year-earlier
quarter. Liquids were sold at $67.92 per barrel, up from the
year-ago price level of $63.20 per barrel.
On the cost front, production expenses increased more than 23%
from the year-earlier level to $1.05 per Mcfe.
At the end of the quarter, Chesapeake had a cash balance of $438
million. Debt balance stood at $13,082 million, representing a
debt-to-capitalization ratio of 44.2% (versus 39.0% in the
preceding quarter). Operating cash flow decreased 34.1% year over
year to $910 million.
Chesapeake expects its 2012 as well as 2013 total production
approximately in the range of 1,286-1,318 Bcfe and 1,300-1,364
For 2012 and 2013, the liquids production forecast range is
41-43 million barrels (MMBbls) and 55-59 MMBbls, respectively.
Chesapeake expects its natural gas production in the bands of
1,040-1,060 Bcf and 970-1,010 Bcf for 2012 and 2013,
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 15.6 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. Recently, the company announced three
divestiture agreements that will raise cash of $2.6 billion in
total to cope with the mounting debt level as well as to fill the
funding gap for its 2012 expenditures that resulted from the low
natural gas prices.
Consequently, Chesapeake announced the curtailment of its
drilling activity in dry natural gas plays from 50 operated rigs in
the beginning of 2012 to an average of 38 rigs by the first
quarter, which is likely to reduce further to 12 rigs in the latter
half of 2012. This includes the two rigs which are most likely to
be operational in the Barnett and Haynesville shale plays to cut
We think Chesapeake's focus on shale gas plays should provide
the impetus to monetize its assets more effectively. This, coupled
with the company's concentration on liquids will boost returns.
However, since natural gas accounted for about 81% 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 on Chesapeake.
The company retains a Zacks #3 Rank (short-term Hold rating).
) currently released its first quarter 2012 results. Even Conoco
failed to meet the Consensus mainly due to lower production
CHESAPEAKE ENGY (CHK): Free Stock Analysis
CONOCOPHILLIPS (COP): Free Stock Analysis
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