Chesapeake Takes Massive Write-Down, Investors Worry


Chesapeake Energy Corp. (NYSE: CHK) reported third quarter 2012 earnings this morning. For the quarter, the oil and gas exploration and production company posted adjusted earnings per share (EPS) of $0.10 on revenues of $2.97 billion. In the same period a year ago, the company reported adjusted EPS of $1.23 on revenues of $3.98 billion. First-quarter results compare to the Thomson Reuters consensus estimates for EPS of $0.10 and $2.43 billion in revenues.

On a GAAP basis, the company posted an EPS loss of $3.19. The one-time items excluded from net income included a $2.02 billion noncash, after-tax impairment charge related to the carrying value of oil and gas properties, a noncash charge of $63 million on losses related to nonperforming hedges, and other charges.

The company's CEO said:

We are pleased to report our liquids production continues its impressive growth, led by a 96% year-over-year and 21% sequential increase in our oil production. Three years ago when Chesapeake was producing only 33,000 bbls per day of liquids, we embarked on a strategy to transform our asset base from one focused almost exclusively on natural gas to one that would provide more balance between liquids and natural gas production and that would likely also lead to higher returns on capital. Our current liquids production now exceeds 140,000 bbls per day, even after excluding 21,000 bbls per day recently sold in the Permian transactions. We believe the company remains on target to reach our goal of 250,000 bbls per day of net liquids production in 2015.

The company produced 4.142 billion cubic feet equivalent of natural gas a day during the third quarter. Production comprised about 3.3 billion cubic feet per day of natural gas and about 143,000 barrels of liquids, of which nearly 98,000 were oil and the rest natural gas liquids (NGL).

Oil production grew by 96% year-over-year, while gas production grew by 19% and NGL production rose 1%. Chesapeake expects natural gas production to decline by 7% in 2013 and forecasts liquids production to grow by 29%.

Investors are going to have to wait until tomorrow morning's conference call to get details on Chesapeake's forecast for the fourth quarter and the full fiscal year. Consensus estimates call for fourth-quarter EPS of $0.13 on revenues of $2.57 and full-year EPS of $0.48 on revenues of $10.73 billion.

Chesapeake is clearly crowing about its oil and NGL production, but NGL prices have softened and crude oil prices are likely to remain below $90 a barrel, while natural gas prices are expected to rise. Chesapeake's strategy may need to be adjusted if these trends continue.

Chesapeake's shares are trading down about 10.6% in after-hours trading at $19.75 in a 52-week range of $13.32 to $29.85. The consensus target price for the shares was around $24.04 before today's report.

Paul Ausick

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