Thursday, February 17, 2011

Chesapeake Energy Corp. (NYSE: CHK): Q4 Earnings Preview

Chesapeake Energy Corporation (NYSE: CHK), the second-largest US natural gas producer, is scheduled to release its fourth-quarter earnings after the closing bell on Tuesday, February 22, 2011. Analysts, on average, expect the company to report earnings of 63 cents a share on revenue of $2.38 billion. In the year ago period, the company reported earnings of 77 cents per share on revenue of $2.22 billion.

Chesapeake Energy Corporation is a producer of natural gas in the United States. The company also owns the largest combined inventory of onshore leaseholds and 3-D seismic acreage in the U.S. Chesapeake, which spent about $5 billion to buy oil and gas property in 2010, has vowed to slow its spending. The company said it needed to spend money on new leases in 2010 in order to expand its oil production. Oil prices rose 15 percent in 2010, while natural gas fell 21 percent.

Natural gas has been touted as the next big fuel, as it burns cleaner, more efficiently, and can be cheaper than oil. Natural gas is taking on a bigger energy role in the U.S., especially for electricity generation.

In the preceding third-quarter, the Oklahoma City, Oklahoma-based company's net income was $515 million, or 75 cents per share, compared with a profit of $186 million, or 30 cents per share, in the year-ago period. On an adjusted basis, the company earned 70 cents per share in the latest quarter. Revenue surged to $2.58 billion from $1.81 billion. Analysts, on average, expected the company to report earnings of 64 cents per share on revenue of $2.31 billion.

Early in January, the company announced that daily production for the fourth quarter averaged around 2.9 billion cubic feet of natural gas equivalent, an increase of 11% over the 2.6 billion cubic feet of natural gas equivalent or bcfe last year. Excluding this sale of future production through a volumetric production payment covering a portion of its Barnett Shale assets, the company's fourth quarter production would have increased 25% year over year. Chesapeake's average daily production for the quarter consisted of around 2.6 billion cubic feet of natural gas and 59.5 thousand barrels of oil and natural gas liquids.

The company has been aggressive in buying up properties in shale gas fields across the United States. But in response to persistent low natural gas prices, the company has vowed to shift its exploration focus away from drilling for gas in places and to instead look for oil.

Last month, the company outlined its 2011-12 strategic and financial plan, "the 25/25 Plan,". Chesapeake said that it plans to reduce long-term debt by 25% by substantially reducing leasehold spending and by reducing its two-year production growth rate to 25% from its previously planned growth rate of 30-40% through asset monetizations. Chesapeake Energy had roughly $11.7 billion in long-term debt on its balance sheet at the end of the third quarter.

Recently, the company announced plans to divest its Fayetteville Shale properties along with its stakes in two private companies, Frac Tech Holdings, LLC and Chaparral Energy Inc in order to reduce its long-term debt level by 25% over the next two years. The sale is expected to be completed within the first half of 2011. With leasehold of approximately 487,000 net acres in the Fayetteville Shale, Chesapeake is the second-leading producer in the field, delivering about 415 million cubic feet equivalent of natural gas every day. Chesapeake holds about 25.8% interests in Cisco, Texas based oilfield-service company Frac Tech and 20.0% in oil-and-gas producer Chaparral Energy, of Oklahoma City. Chesapeake targets to utilize a part of the sale consideration to trim about $2.0 billion to $3.0 billion of its shorter-dated senior notes and cut down on borrowings under its revolving bank credit facility.

Late in January, the company agreed to sell several shale oil and gas leases in the U.S to Chinese oil giant Cnooc Ltd. for $570 million in cash. Cnooc, China's third-largest oil and gas producer by capacity, said it will take a 33.3% stake in leases covering 800,000 acres in the Denver-Julesburg and Powder River Basins in northeast Colorado and southeast Wyoming states. In addition to the transaction amount, Cnooc will fund two-thirds of Chesapeake's share of drilling and other costs up to maximum of US$697 million.

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