Friday, April 29, 2011

Chesapeake Energy Corp. (NYSE: CHK): Q1 Earnings Preview 2011

Chesapeake Energy Corporation (NYSE: CHK), the second-largest US natural gas producer, is scheduled to release its first-quarter earnings after the closing bell on Monday, May 2, 2011. Analysts, on average, expect the company to report earnings of 70 cents a share on revenue of $2.68 billion. In the year ago period, the company reported earnings of 82 cents per share on revenue of $2.80 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. 

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.

Early this year, 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. 

In the preceding fourth-quarter, the Oklahoma City, Oklahoma-based company's net income was $180 million, or 28 cents per share, compared to a loss of $530 million, or 84 cents per share, in the prior year quarter. On an adjusted basis, the company earned 70 cents per share in the latest quarter. Revenue declined 11% to $1.98 billion from $2.22 billion in the same quarter last year. Analysts, on average, expected the company to report earnings of 63 cents a share on revenue of $2.38 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.

At its last earnings call in Februray, the company forecast full-year production growth of 9% and 17% for 2011 and 2012, respectively. Liquids production is expected to range between 32,000-36,000 thousand barrels (MBbls) and 51,000-57,000 MBbls for 2011 and the next year, respectively. Further, natural gas output is expected to be in bands of 900 to 930 Bcf for 2011 and 960 to1,000 Bcf for 2012.

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.

The company recently sold 487,000 acres of leasehold and producing natural gas property in the Fayetteville Shale in Arkansas to BHP Billiton Ltd. of Australia for $4.75 billion. Chesapeake will use the money to pay down debt.

Chesapeake Chief Executive Officer Aubrey McClendon has told investors he plans to expand the company's oilfield services business as a way to control costs on that side of the exploration and production business. The company already has rig and trucking operations and is looking to expand its hydraulic fracturing business as it steps up drilling in oil and gas shale fields in the United States.  

Recently the company agreed to uy Bronco Drilling Company, Inc. for approximately $315 million, including debt, net working capital and outstanding warrants. The acquisition will enable Chesapeake to further its goal of owning approximately two-thirds of the rigs that it operates in its drilling program -- a key aspect of its vertical integration strategy -- at an attractive price per rig. Bronco currently owns 22 high-quality drilling rigs primarily operating in the Williston and Anadarko basins, including three that are under contract with Chesapeake. Chesapeake is currently Bronco's second largest customer. Chesapeake believes that the acquisition of Bronco should satisfy the vast majority of Chesapeake's anticipated rig investment needs through 2012.

Meanewhile, Chesapeake iscontinuing to deleverage after years of heavy borrowing with plans to repurchase several of its outstanding bonds using the proceeds from recent asset sales.The Oklahoma City-based natural gas giant had total debt outstanding of $12.5 billion at end of December. In February, Chesapeake Energy priced a $1 billion 10-year bullet senior notes issue at 6.125 percent, as part of a liability management program to extend and retire debt.

The company's stock currently trades at a forward P/E (fye Dec 31, 2012) of 10.21 and PEG ratio (5 yr expected) of 1.05. In terms of stock performance, Chesapeake shares have gained nearly 40 percent over the past year.

Full Disclosure: None.
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