Exploration & Production | Quarterly / Earnings Reports | Production | Third Quarter (3Q) Update | Forecast - Production | Capital Markets | Private Equity Activity
Chesapeake Continues to Cut Costs in 3Q; Talks Capital Efficiency
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Chesapeake Energy Corporation reported financial and operational results for the 2014 third quarter. Key information is as follows:
- Company reports adjusted net income of $0.38 per fully diluted share and adjusted ebitda of $1.236 billion
- Average production of approximately 726,000 boe per day increases 11% year over year, adjusted for asset sales
- Capital expenditures of $1.351 billion decrease 8% year over year
- Eagle Ford, Haynesville, Utica and Powder River Basin operating areas each achieve organic production growth in excess of 10% quarter over quarter
Doug Lawler, President and Chief Executive Officer of Chesapeake, commented: "The improvements in our capital efficiency, our focus on cost leadership and the strength and quality of our assets and talented employees are very clear in our third quarter results. Our results this quarter were outstanding, as adjusted production increased 11% compared to the 2013 third quarter, increased 5% sequentially and already reached our year-end exit rate target of approximately 730,000 barrels of oil equivalent per day during the month of September. We have also seen a reduction in operating expenses compared to both the 2014 second quarter and the 2013 third quarter, and we continue to see dramatic improvement in capital efficiency throughout our operating areas. The company again exceeded its production growth target while operating below our capital budget. I am very proud of our results and believe they are further evidence that our strategy and commitment to becoming a top-tier E&P company will yield long-term stockholder value."
2014 Third Quarter Average Daily Production of Approximately 726,000 Boe Increases 11% Year over Year, Adjusted for Asset Sales
Chesapeake’s daily production for the 2014 third quarter averaged 725,600 barrels of oil equivalent (boe), a year-over-year increase of 11%, adjusted for asset sales. Average daily production consisted of approximately 118,900 barrels (bbls) of oil, 95,900 bbls of NGL and 3.1 billion cubic feet (bcf) of natural gas.
Sequentially, 2014 third quarter average daily oil production increased 5%, average daily NGL production increased 14% and average daily natural gas production increased 3%, adjusted for asset sales.
Operations Update
As described below, Chesapeake has demonstrated significant improvements in its capital efficiency, cycle times and well cost reductions, all of which are driving competitive value creation for our stockholders.
Southern Division
Chesapeake Touts 'Outstanding' Eagle Ford Ops; Drills 89 Wells
Chesapeake Averages 146 Days Spud-to-Sales in the Haynesville
Northern Division
Chesapeake Details Marcellus, Utica Frac Efficiencies; Grows Production
Chesapeake Cuts Powder River Well Costs; Outlines Completion Design
Chesapeake Targeting $2.9 Million/Well Goal in the MissLime
Recent Transactions
On October 14, 2014, Chesapeake entered into a purchase and sale agreement to sell certain assets in the southern Marcellus Shale and a portion of the eastern Utica Shale to a subsidiary of Southwestern Energy Company for aggregate proceeds of approximately $5.375 billion. The transaction, which is subject to certain customary closing conditions, including the receipt of third-party consents and waiver of participation rights, is expected to close in the 2014 fourth quarter.
In July 2014, Chesapeake repurchased all of the outstanding preferred shares of its unrestricted subsidiary CHK Utica, L.L.C. (CHK Utica) from third-party preferred shareholders. Chesapeake paid approximately $1.25 billion to repurchase 1,060,000 preferred shares of CHK Utica.
In August 2014, the company completed an exchange of properties in the Powder River Basin (PRB) with RKI. Chesapeake exchanged its nonoperated northern PRB acreage and $450 million in cash paid by the company for RKI's southern PRB acreage.
Capital Spending and Costs
Chesapeake's capital expenditures in the 2014 third quarter were approximately $1.351 billion, of which drilling and completion capital expenditures were approximately $1.241 billion and capital expenditures for the acquisition of unproved properties, geological and geophysical costs and other property, plant and equipment were approximately $110 million. In the 2013 third quarter, capital expenditures were approximately $1.461 billion, of which drilling and completion capital expenditures were approximately $1.248 billion and capital expenditures for the acquisition of unproved properties, geological and geophysical costs and other property, plant and equipment were $213 million.
Drilling and completion expenditures in the 2014 third quarter increased approximately $110 million, or 10%, compared to the 2014 second quarter, primarily due to increased well completions and connections. Chesapeake spud a total of 296 gross wells and connected 311 gross wells to sales during the 2014 third quarter, compared to 324 gross wells spud and 275 gross wells connected to sales during the 2014 second quarter. The company reiterates its 2014 full-year total capital expenditure guidance of $5.0 – $5.4 billion, excluding capitalized interest and the company's exchange of properties with RKI Exploration & Production, LLC (RKI) (discussed below).
Chesapeake's focus on cost discipline continued to generate reductions in production and general and administrative expenses. Together, these costs (including share-based compensation) were $5.37 per boe in the 2014 third quarter, as compared to $5.89 in the 2014 second quarter and $6.47 in the 2013 third quarter.
Financial Results
For the 2014 third quarter, Chesapeake reported net income available to common stockholders of $169 million, or $0.26 per fully diluted share. Items typically excluded by securities analysts in their earnings estimates reduced net income available to common stockholders for the 2014 third quarter by approximately $82 million and are presented on Page 12 of this release. The primary component of this reduction was the redemption of all the outstanding preferred shares of a subsidiary, partially offset by unrealized gains on our commodity derivatives. Adjusting for these items, 2014 third quarter adjusted net income available to common stockholders was $251 million, or $0.38 per fully diluted share, as compared to adjusted net income available to common stockholders of $282 million, or $0.43 per fully diluted share, in the 2013 third quarter.
Adjusted ebitda was $1.236 billion in the 2014 third quarter, compared to $1.325 billion in the 2013 third quarter. Operating cash flow, which is cash flow provided by operating activities before changes in assets and liabilities, was $1.293 billion in the 2014 third quarter, compared to $1.412 billion in the 2013 third quarter. The year-over-year decreases in adjusted ebitda and operating cash flow were primarily the result of lower realized oil, natural gas and natural gas liquids (NGL) prices, partially offset by higher production volumes and lower operating expenses.
Adjusted net income available to common stockholders, operating cash flow, ebitda and adjusted ebitda are non-GAAP financial measures. Reconciliations of these measures to comparable financial measures calculated in accordance with generally accepted accounting principles are provided on pages 11 – 16 of this release.
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