Random thoughts and Energy news....
NGL / Oil Ratio approaching late 2008 lows. Compression of ratio signaling US NGL oversupply. Producers using oil as a dirty hedge to NGL production watching their hedges not hedge. Composite NGL barrel below $40. Still better than $2 dry gas, but a 50/50 dry gas/NGL play getting something like $4.50/Mcfe or $27.25/BOE blended, hardly something to cheer about. Good for US ethane crackers, bad for US energy industry.
Simple avg of the group, down 37% from 52W high with no signs of the pain trade subsiding...
summary....lower. click to enlarge
Nat gas oversupply part II ?
Clearly they aren't the only gassy e&p in this camp, but the numbers are the biggest...
1Q 2012 cash flow margins shown compared to 2011 average. This metric is impacted by a number of factors, including but not limited to cost structure, commodity mix, hedges, and financial leverage. Gas prices clearly impacted the vast majority of US e&p's as cash costs couldn't be lowered enough to offset the top line decline. There were a few outliers that improved on this metric and a quick look not surprisingly shows they are oil-leveraged or companies that are transitioning to a more liquids production base.
Note: this metric is cash flow before working capital divided by oil & gas revenue adjusted for realized hedges.
Not a lot to like in general, but some random notes after going through the numbers and release:
- Overall production +0.6% sequentially. Gas production essentially flat q/q despite voluntary curtailments and production lost through VPPs, so not seeing any real nat gas production declines.
- Liquids production +6.2% q/q to 113,533 Bbls/d. CHK doesn't split out its oil and NGL mix, but my guess given the pre-hedge realized liquids price is that number is roughly 40-45% oil and 55-60% NGLs.
- Liquids production as % of overall production ticked up to 18.6%, from 17.8% in 4Q11.
- Pre-hedge nat gas pricing was an amazingly low $1.77/Mcf (from $2.65/Mcf in 4Q11), so they not only got hurt by low prices, but apparently they also got hit by basis or gathering/marketing/transportation differentials.
- Pre-hedge natural gas and liquids revenues dropped by $145mm vs 4Q while nat gas and liquids revenues including realized hedges dropped by $343 million.
- LOE ticked up by $57 million (from $0.88 to $1.05 per Mcfe) despite the flattish overall production. Not surprisingly production costs will tick up as the % of liquids increases, but the 19% jump q/q looks excessive relative to the marginal change in liquids mix.
- Adjusted EBITDAX declined by a whopping 36% q/q to $838 million. This needs to be put in context. That is the lowest reported adj. EBITDAX since the third quarter of 2005, nearly 7 years ago when CHK's production was more than 60% lower. LTM adj. EBITDAX dropped by $508 million. For fun, if you slap a 5x multiple on the change in LTM EBITDAX, then divide by the share count (which dropped significantly q/q, perhaps due to the share price dropping below strikes in converts), you could back into a $3-4 hit to the share price.
- Marketing gross margin continues to slide, now down to 1.56%, from a consistent 3-5% a year or more ago.
- Per unit DD&A creeped up to $1.52/Mcfe and I would expect the number to continue to rise via higher cost liquids F&D and as drilling carries roll off.
- Per unit cash break-even (including reported interest) was $1.54/Mcfe, however when adjusting for estimated capitalized interest (CHK capitalizes basically 100% of their interest), that number is closer to $2.05/Mcfe (compare that to the $1.76/Mcfe pre-hedge gas price).
- Not surprisingly, cash flow was weak. Reported cash from operations was a paltry $251 million, but the more important cash flow before working capital was $910 million, again the lowest number going back many years. Of course that didn't stop CHK from outspending cash flow by $3 billion or so. FFO/Mcfe & FFO/Revenue were also at 5+ year lows.
- Debt was +$2.5 billion q/q. They are have some many different subsidiaries it tough to get much meaning from a debt/EBITDAX multiple now as everything still consolidates, but that metric ticked higher to 2.67x. TD/Proved and TD/Proved Developed Reserves were $0.66/Mcfe and $1.23/Mcfe, respectively, with proved reserves up to 19.8 Tcfe (54% PD).
- CHK continues to promise a reduction in debt to $9.5 billion by year-end.
- They have no gas hedges whatsoever, but have hedged 60% of remaining 2012 liquids production at $103.02. Given its unlikely 60% of liquids production is oil, I assume they are using oil as a dirty hedge to NGLs, but of course are exposed to the NGL/WTI ratio as a result.
- CHK reported a $194 million hedge loss related to liquids hedges in 2012, which may relate to the call options they sold on oil as part of their "natural gas hedges" a year or so ago.
- $9 to $11.5 billion of additional asset monetizations remain on track - Permian Basin asset sale, Miss Lime JV, VPP in Eagle Ford, sale of various non-core oil and gas assets and partial monetization of the oilfield service business.
- Eagle Ford production of 23k BOE/d (55% oil, 20% NGLs, 25% nat gas); plan to avg 30 rigs.
- MIss Lime production of 12.8k BOE/d (40% oil, 15% NGLs, 45% nat gas).
- Utica Shale - post-processing peak rates avg 1,325 BOE/d (31% oil, 19% NGLs, 50% gas) in the wet gas window.
- Cleveland and Tonkaway Sand production of 18.5k BOE/d (50% oil, 15% NGLs, 35% gas).
- CHK is REDUCING its drilling in liquids rich plays from 123 rigs in 1Q12 to an average of 115 rigs in 2H12.
- 2012-2013 D&C Capex reduced by $750 million at the mid-point, but indicates a $500 million increase this year and a $1.25 billion decrease next year.
- Spent $900 million on leasehold in 1Q, primarily in Utica and ML. Projecting $700 million for remainder of 2012 and $500 million for 2013 (a $425 million reduction from prior guidance).
- In 2012, CHK has 60% of its forecasted liquids production hedged with oil swaps and 13% with oil calls. They are clearly over-hedging their oil production, either as a dirty hedge to NGLs or are simply willing to potentially lose money on near-year call option positions to fund drilling for future production through premiums received. Likewise, CHK has 9% of its 2013 liquids production hedged with oil swaps, but also 44% hedged with oil call options, so effectively 100% of oil production is hedged if only 50% of the liquids production is oil.