Chesapeake Energy Corp. (
CHK ) reported second-quarter earnings of $0.62 per share, compared with the Zacks Consensus Estimate of $0.50 and a year-ago quarter profit of $0.90 per share. The year-over-year fall was due to weak natural gas prices, partially offset by lower production costs.
Production
Chesapeake's average daily production for the quarter increased 5% year over year and 4% sequentially to 2.45 billion cubic feet equivalent (Bcfe), of which natural gas was 92%.
Taking into account the company's voluntary production curtailments due to low natural gas prices (averaging about 74 million cubic feet equivalent per day – MMcfe/d), three 2008 volumetric production payment sales (averaging approximately 139 MMcfe/d) and estimated impact from the sale of its Woodford Shale and Fayetteville Shale properties (averaging roughly 81 MMcfe/d), Chesapeake's year-over-year and sequential production growth rates were 16% and 4%, respectively.
Realizations
Average realizations for the quarter were $5.56 per thousand cubic feet (Mcf) for natural gas, compared to $6.05 per Mcf in the previous quarter and $8.18 per Mcf in the year-ago period. Realizations came to $56.72 per barrel of oil, compared to $39.12 per barrel in the previous quarter and $76.96 per barrel a year earlier.
Proved Reserves
At the end of the quarter, Chesapeake had proved reserves of approximately 12.5 trillion cubic feet equivalent (Tcfe), an increase of 6% from the end of the previous quarter. Total drilling and net acquisition costs for the quarter were $0.72 per Mcfe.
During the quarter, the company replaced 223 billion cubic feet equivalent (Bcfe) of production with an estimated 897 Bcfe of new proved reserves for a reserve replacement rate of 402%.
Liquidity
At the end of the quarter, Chesapeake had a cash balance of $554 million and a debt-to-capitalization ratio of 53.1%, compared to 52.3% as of Mar 31, 2009. The company plans to reduce its debt level and strengthen its balance sheet through asset monetization and the growth of its proved reserve base.
For this, Chesapeake is aiming to monetize its leasehold along with its producing properties, midstream assets and other assets for $2.35 to $3.05 billion in 2009 and $1.25 to $1.80 billion in 2010.
Company Guidance
Chesapeake is guiding for production of 12 million barrels of oil and 875–885 Bcfe of natural gas in 2009. In 2010, the company expects 12 million barrels of oil production and 940–960 Bcfe of natural gas. It sees an increase in planned drilling activity levels and raised its drilling capital expenditure budget for 2009 and 2010 to $6.7 billion from $6.0 billion.
Outlook
With the bulk of its projected 2009 production hedged at attractive prices and with access to resource-rich assets, Chesapeake remains better positioned than most of its peers to operate in the current low commodity price environment.
A steep decline in natural gas production on the back of lower drilling activity will soon lead to tighter natural gas markets. This will lift natural gas prices and improve the company's profitability in 2010 and beyond, in our view.
Additionally, the company's asset-monetization initiatives have led to greater financial flexibility. Chesapeake is expected to post 4%–5% volume growth this year and 7%–8% in 2010, highlighting the quality of its asset base. We recommend a Neutral rating for Chesapeake shares.