Chesapeake Energy Corp (CHK)

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3 Key Takeaways From Chesapeake Energy's Earnings

By Investopedia | May 06, 2015 AAA |

The nation's second-largest natural gas producer, Chesapeake Energy (NYSE: CHK), reported its first-quarter results before the opening bell on Wednesday. Despite very weak commodity prices the report was largely positive as the company did manage to beat the analysts' consensus estimates and raised its production guidance for the full year. Here are the three most important takeaways from that report.

1. It's not really losing money
At first glance some investors might be startled to see that Chesapeake Energy reported a loss of $3.8 billion, or $5.72 per share, for the quarter. However, it is important to know that the company isn't really losing money. That loss was due to the fact that the company needed to take an asset impairment of $3.8 billion as a result of lower commodity prices, a loss that could be reversed once prices improve.

Instead, Chesapeake Energy is actually making money and after adjusting for that loss the company earned $42 million, or $0.11 per share. Though, that is well below the $405 million, or $0.59 per share it earned in the first-quarter of last year as the drop in commodity prices is having an impact on profitability. That said, the company's operating cash flow was even stronger than earnings at $910 million. While that is less than the $1.5 billion Chesapeake spent on capex, the company remains on pace to balance capex with cash flow for the full-year.

2. Costs are dropping
One of the reasons that Chesapeake is still making money in the weak commodity price environment is due to the fact that its costs are falling. The company's production expenses dropped 5% over the prior quarter while its general and administrative, or G&A expenses, are down 34% over the prior quarter. This is pushing the company's costs down to industry-low levels.

In addition to falling production costs, Chesapeake Energy is also benefiting from a drop in capital costs. The company expects its well costs to fall throughout 2015, which will enable the company to drill more wells with less money. For example, it sees its well costs in the Eagle Ford shale dropping from a $5.9 million average in 2014 to $5.5 million this year with similar reductions across all of its core areas.

3. Outlook is improving
As a result of these lower capital costs, as well as stronger overall well performance due to the company's optimization efforts, Chesapeake Energy is bumping up its production guidance for 2015. The company's previous guidance was that $3.5 billion-$4 billion in capex would result in production of 635,000-645,000 barrels of oil equivalent per day, or BOE/d in 2015. That would have been 1%-3% higher production, on an adjusted basis, than the company produced last year.

However, the company now sees that same capex fueling production of 640,000-650,000 BOE/d in 2015. It's the same general 1%-3% in production growth, but the company is now expecting to produce more oil and gas for the same amount of money as its capital and operational efficiencies drive better results.

Investor takeaway
Obviously weak oil and gas prices are having an impact on Chesapeake Energy's profitability. However, the company is doing an exceptional job cutting its costs to mute some of the impact of weaker commodity prices. These costs cutting measures are leading to a better outlook for the full-year as the company expects to deliver more production for the same capital spend.


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