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Chesapeake's EPS Drops, Rev Grows

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Natural gas provider Chesapeake Energy Corp. (CHK - Free Report) reported adjusted second quarter 2012 earnings of 6 cents per share, missing the Zacks Consensus Estimate of 8 cents. The reported figure also declined significantly from the year-earlier profit of 76 cents a share. The underperformance came on the heels of a nearly 64% decline in average price realizations for natural gas.

Total revenue increased 2.1% year over year to $3,389 million from $3,318 million and surpassed the Zacks Consensus Estimate of $1,891 million.

Operational Performance

Chesapeake’s average daily production in the quarter increased nearly 25% year over year to 3,808 million cubic feet equivalent (MMcfe), of which natural gas accounted for 79%. The percentage of natural gas production to total volume decreased 5% points on an annualized basis. However, natural gas production grew to 3,027 million cubic feet (Mcf) from 2,575 Mcf, while oil production expanded 65% from the year-ago level.

Natural gas equivalent realized price in the reported quarter was $3.77 per thousand cubic feet equivalent (Mcfe) versus $6.07 in the year-earlier quarter. Average realizations for natural gas were $1.88 per Mcf compared with $5.19 per Mcf in the year-earlier quarter. Liquids were sold at $91.58 per barrel, up from the year-ago price level of $87.99 per barrel.

On the cost front, production expenses increased more than 3% from the year-earlier level to 97 cents per Mcfe.


At the end of the quarter, Chesapeake had a cash balance of $1,024 million. Debt balance stood at $14,329 million, representing a debt-to-capitalization ratio of 42.0% (versus 44.2% in the preceding quarter). Operating cash flow decreased 25.8% year over year to $895 million.


Chesapeake expects 2012 as well as 2013 total production to be in the range of 1,286–1,318 Bcfe and 1,300–1,364 Bcfe, respectively.

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, 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, like its peers - Range Resources Corporation (RRC - Free Report) and ConocoPhillips (COP - Free Report) . The company has grown rapidly and now ranks the second-largest producer of natural gas. Since 2000, the company has created the largest combined inventories of onshore leasehold of about 15.9 million net acres in the U.S.

It also holds a leading position in 10 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 and the Texas Panhandle; the Marcellus Shale in Pennsylvania and West Virginia, the Haynesville shale in western Louisiana; the Barnett shale in north Texas; the Eagle Ford Shale in South Texas; the Niobrara Shale in the Powder River Basin and the Utica Shale in Ohio.

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 79% 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.

The company retains a Zacks #3 Rank (short-term Hold rating).

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