Dashboard‎ > ‎Commentary‎ > ‎

Chesapeake Energy Earnings Notes

posted May 1, 2012, 10:24 PM by Jeff Davies   [ updated May 2, 2012, 8:39 AM ]
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.
Comments