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Chesapeake Q2 Earnings Outshine

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Natural gas provider Chesapeake Energy Corp. (CHK - Free Report) reported adjusted second quarter 2013 earnings of 51 cents per share, up over sevenfold from 6 cents in the year-earlier quarter and ahead of the Zacks Consensus Estimate of 39 cents. The outperformance came on the back of improved oil production and higher price realization.

Total revenue improved nearly 38% to $4,675.0 million from $3,389.0 million a year ago. The top line also got the better of the Zacks Consensus Estimate of $1,804.0 million.

Operational Performance

Chesapeake's average daily production in the quarter increased 6.3% year over year to 369 billion cubic feet of natural gas equivalent (Bcfe), of which natural gas accounted for 75%. The percentage of natural gas production to total volume decreased 4% points on an annualized basis. However, natural gas production grew 1.1% to 278 billion cubic feet (Bcf) from 275 Bcf, while oil production expanded 43.9% from the year-ago level.

Natural gas equivalent realized price in the reported quarter was $4.96 per thousand cubic feet equivalent (Mcfe), up 31.6% from $3.77 in the year-earlier quarter. Average realizations for natural gas were $2.62 per Mcf compared with $1.88 per Mcf in the year-earlier quarter. Liquids were sold at $93.81 per barrel, up 2.4% from the year-ago price of $91.58 per barrel.

On the cost front, production expenses decreased 19.6% from the year-earlier level to 78 cents per Mcfe.


At the end of the quarter, Chesapeake − the largest U.S. natural gas producer after ExxonMobil Corporation (XOM - Free Report) − had a cash balance of $677 million. The debt balance stood at $13,057 million, representing a debt-to-capitalization ratio of 41.8%. Operating cash flow increased 71.9% year over year to $1,298.0 million.


As the company shifts its focus to more liquid-rich plays, it expects natural gas production to fall approximately 7% in 2013, while liquids production is expected to increase approximately 27%.

Chesapeake expects 2013 total production in the band of 1,434–1,478 Bcfe. Natural gas is expected to contribute 1,080–1,100 Bcf to the total production. Oil production forecast is 38–40 million barrels/MMBbls, and NGL will likely be in the 21–23 MMBbls range.

During 2013, Chesapeake aims to spend approximately 86% of its total drilling and completion capex on liquids-rich plays. The company also plans to invest heavily in the development of its holdings in the Eagle Ford Shale, Granite Wash and Mississippi Lime.

Zacks Rank

Chesapeake retains a Zacks Rank #3 (short-term Hold rating). However, there are Zacks Ranked #1 (Strong Buy) stocks in the oil and gas industry like Gulfmark Offshore, Inc. (GLF - Free Report) and Dril-Quip, Inc. (DRQ - Free Report) that appear attractive in the short term.

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