Chesapeake Energy
(
CHK
) reported its earnings for Q2 on August 6, which was significantly
impacted by increased liquids output. While natural gas sales fell
by nearly 65% y-o-y to reach $354 million, oil sales nearly tripled
to reach $1,626 million in comparison to Q2, 2011. Indeed, oil
sales could more than offset loses in natural gas sales, raising
overall revenues by 2% for the quarter. Natural gas liquids (
NGL
) sales, however, increased marginally. The company reported a more
than 100% in net income as it realized a $1,030 million as gain on
sale of assets primarily relating to sale of its stake in Midstream
Partners.
The company looks to be right on track to achieving its 25/25
plan which entails a 25% increase in output and 25% reduction in
debt by end of FY2012. Its average daily production increased to
3.8 Bcfe per day from 3.6 Bcfe showing nearly 25% y-o-y growth. The
growth is primarily met by 65% growth in Liquids production (Oil
and NGL put together) while natural gas production remained flat.
Liquids now form nearly 22% of production and 70% of total revenues
for Chesapeake compared to 16% and 40%, respectively in the same
period last year. The company displayed improvement in its EBITDA
margin this quarter riding on nearly a 20% reduction in marketing,
gathering and compression costs. Its EBITDA increased from $1,422
in Q2, 2011 to $1,652 million this quarter, implying a 16% rise
despite meagre 2% increase in total revenues. Let's look at the
emerging trends for Chesapeake in more detail.
We have recently revised our forecasts for Chesapeake based on
Q2 earnings and outlook reported by the company. We now have a
price estimate of $21 for Chesapeake
. The key changes we made in the model include an increase in
forecasts for oil and NGL production, and natural gas production
while reducing gas price and increasing oil and NGL average price.
Natural gas EBITDA margin has been reduced compared to previous
estimates to reflect the decline in realizable natural gas price.
We have also increased the forecasts for capital expenditure as %
of EBITDA. Other revisions include an update of balance sheet
entries like cash and debt and the new share count after
stock-split.
See our complete analysis for Chesapeake
Diversification and Margin improvement
During Q2, Chesapeake displayed its flexibility to alter
operations as it diversified its production assets. It is no longer
entirely dependent on natural gas, even though a majority of its
production is still dry natural gas. The maximum contribution in
this quarter's revenue came from oil production. The company has a
significant asset base in major oil and gas basins including Eagle
Ford Shale and Marcellus Shale, enabling it to vertical integrate
its operations. It has developed pipeline transportation for all of
its projected production in Eagle Ford Shale. This
is likely to reduce transportation cost
significantly as it can bypass truck transportation altogether.
These efforts will collectively help in saving costs and expand
margins for the company in the future.
What to expect in FY2012
For the rest of the year the company is likely to cling to
liquids production, in particular oil production to help it
overcome the massacre of natural gas prices while equally focusing
on asset monetizations. The company's improved capital expenditure
plans in conjunction with plans to reduce debt could pull it into a
funding shortfall position. However, looking at the company's track
record at selling assets, it would not be surprising if it can
achieve all of its asset divestitures it in time. Besides that,
company's capital expenditures to pump up the liquids production
have been optimal as it materially raised output. In its recently
published outlook, it has considerably raised the overall
production volumes for the years 2012 as well as 2013 compared to
previous estimates published in May, 2012. Looking at the company's
turnaround in such a short period of time, we believe, it is headed
for a bright future. Moreover, if natural gas prices recover in the
meantime, it will have significant upside. One must, however, need
to keep a keen eye on how successfully Chesapeake executes its
asset monetizations to maintain a healthy balance sheet and avert
cash short fall.
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