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Chesapeake Slashes Rigs, Sees Positive Results in Q2

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Chesapeake Slashes Rigs, Sees Positive Results in Q2

Chesapeake Energy Corporation reported financial and operational results for the 2013 second quarter.

Key information related to the quarter is as follows:

  • Adjusted net income per fully diluted share of $0.51, compared to $0.06 in the 2012 second quarter
  • Adjusted ebitda of $1.424 billion increases 77% year over year
  • Daily oil production rises 44% year over year to 116,000 bbls per day
  • Full-year 2013 oil production outlook increases by 1 million barrels to 38 – 40 million barrels, a 22 to 28% increase year over year
  • Total daily production increases 7% year over year to 4.1 bcfe per day

Chesapeake reported net income available to common stockholders of $457 million, or $0.66 per fully diluted share.

Operational Update

The company continues to achieve strong operational results in its most active plays, as highlighted in the individual reports below:

These results include the effects of the following after-tax items:

  • noncash unrealized mark-to-market gains of $325 million from the company’s derivative instruments;
  • a noncash charge of $143 million for the impairment of certain of the company’s property and equipment, consisting primarily of noncore real estate;
  • a net gain of $68 million on sales of certain of the company’s property and equipment, consisting primarily of midstream assets;
  • a charge of $44 million on the repurchase of $1.894 billion aggregate principal amount of the company’s senior notes; and
  • a $69 million premium paid over the carrying value on the purchase of preferred shares of a company subsidiary.

Adjusting for these and other items not typically included in earnings estimates by securities analysts, Chesapeake reported adjusted net income available to common stockholders of $334 million, or $0.51 per fully diluted share, which compares to adjusted net income available to common stockholders of $3 million, or $0.06 per fully diluted share, in the 2012 second quarter.

The company reported adjusted ebitda of $1.424 billion, an increase of 77% year over year. Operating cash flow, which is cash flow provided by operating activities before changes in assets and liabilities, was $1.370 billion, an increase of 53% year over year. Additional definitions and reconciliations to comparable financial measures calculated in accordance with generally accepted accounting principles of adjusted net income available to common stockholders, operating cash flow, ebitda and adjusted ebitda are provided on pages 12 - 16 of this release.

Doug Lawler, Chesapeake’s Chief Executive Officer, said, "Chesapeake reported a strong quarter operationally and financially. I am very excited and energized by what I have seen during my first six weeks with the company. Chesapeake has an exceptionally broad and deep asset base, which offers tremendous opportunity for value creation. A comprehensive companywide review of our capital allocation and other processes is underway and I believe these initiatives will result in substantial further improvement in both near-term and long-term capital efficiency and returns."

Production Summary

2013 Second Quarter Total Production Increases 7% Year over Year to 4.1 Bcfe per Day; Oil Production Increases 44% Year over Year to 116,000 Bbls per Day

Chesapeake’s daily production for the 2013 second quarter averaged approximately 4.1 billion cubic feet of natural gas equivalent (bcfe), an increase of 7% from the 2012 second quarter and an increase of 2% from the 2013 first quarter. The company’s average daily production consisted of approximately 3.1 billion cubic feet (bcf) of natural gas and approximately 168,000 barrels (bbls) of liquids, comprised of approximately 116,000 bbls of oil and approximately 52,000 bbls of natural gas liquids (NGL).

During the 2013 second quarter, average daily oil production increased 44% year over year and 12% sequentially, and average daily NGL production increased 5% year over year and decreased 4% sequentially. The sequential NGL volume decrease was primarily the result of increased ethane rejection during the second quarter. Liquids accounted for 25% of total production during the 2013 second quarter, up from 21% during the 2012 second quarter.

Steve Dixon, Chesapeake’s Chief Operating Officer, commented, "We are raising our full-year 2013 oil production guidance by 1 million barrels (mmbbls) to 38 – 40 mmbbls, representing a growth rate of 22 to 28% year over year, due to good well performance, an accelerated pace of well completions in the Eagle Ford Shale and timing of asset sales. We are also reducing our 2013 NGL production guidance by 2 mmbbls to 21 – 23 mmbbls to reflect ethane rejection that occurred during the second quarter and thus far in the third quarter as well as anticipated delays associated with third-party gathering, compression and processing in the Utica Shale."

Capital Spending and Cost Overview

During the 2013 second quarter, Chesapeake operated an average of 76 rigs, a decrease of seven rigs compared to the 2013 first quarter, and invested approximately $1.6 billion in drilling and completion costs. This brings drilling and completion costs for the first half of 2013 to approximately $3.1 billion. Chesapeake spud a total of 312 wells and completed 410 wells during the 2013 second quarter, compared to 294 wells spud and 352 wells completed during the 2013 first quarter.

During the second half of 2013, Chesapeake plans to operate an average of 64 rigs compared to an average of 81 rigs during the first half of the year. The company also plans to complete approximately 20% fewer wells in the second half of 2013 compared to the first half of the year. Based on these planned activity levels, the company is reducing its 2013 full-year guidance for drilling and completion costs from a range of $5.75 – $6.25 billion to $5.7 – $6.0 billion.

Net expenditures for the acquisition of unproved properties were approximately $55 million during the 2013 second quarter, bringing 2013 first-half net expenditures for the acquisition of unproved properties to approximately $100 million. The company continues to track below its budgeted leasehold expenditures for the year and is lowering its 2013 full-year leasehold expenditure guidance from $400 million to $300 – $350 million. Other capital expenditures were approximately $190 million during the 2013 second quarter and $535 million during the first half of 2013.

Average production expenses during the 2013 second quarter were $0.78 per thousand cubic feet of natural gas equivalent (mcfe), a decrease of 20% year over year. General and administrative (G&A) expenses (excluding stock-based compensation) were $0.25 per mcfe, a decrease of 36% year over year. To reflect improvements in cost control, Chesapeake is reducing its 2013 per unit G&A expense guidance range by $0.05 to $0.25 – $0.30 per mcfe.

A complete summary of the company’s guidance for 2013 is provided in the Outlook dated August 1, 2013 which is attached to this release as Schedule “A” beginning on Page 17. This updates information previously provided in the Outlook dated May 1, 2013.

Asset Sales Update

Chesapeake continues to make significant progress in selling noncore assets. During the first half of 2013, the company received proceeds of approximately $2.4 billion from asset sales. During the 2013 third quarter to date, the company has completed the sales of additional assets in the Haynesville Shale and Eagle Ford Shale to subsidiaries of EXCO Resources, Inc. for total consideration of approximately $1 billion (inclusive of approximately $100 million that is subject to customary post-closing contingencies) and expects to complete today the sale of midstream assets in the Mississippi Lime play to SemGroup Corporation for total consideration of approximately $300 million. Chesapeake is also pursuing several other transactions of varying sizes that may reach completion before the end of 2013.

Key Financial and Operational Results

The table below summarizes Chesapeake’s key financial and operational results during the 2013 second quarter and compares them to results during the 2013 first quarter and the 2012 second quarter.