Exploration & Production | Quarterly / Earnings Reports | Second Quarter (2Q) Update | Capital Markets | Private Equity Activity
Chesapeake Ups 2014 Outlook After Solid Second Quarter
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Chesapeake Energy Corporation reported financial and operational results for the 2014 second quarter.
Highlights:
- Company reports adjusted net income of $0.36 per fully diluted share and adjusted ebitda of $1.277 billion
- Average production of approximately 695,000 boe per day increases 13% year over year, adjusted for asset sales
- Average oil production of approximately 113,400 bbls per day increases 12% year over year, adjusted for asset sales
- Total capital expenditures of $1.3 billion decrease 27% year over year
- Company increases midpoint of 2014 production outlook by 10,000 boe per day, reiterates 2014 total capex of $5.0 to $5.4 billion
- Spin-off of oilfield services business completed June 30, 2014
Doug Lawler, Chesapeake’s Chief Executive Officer, commented, "Chesapeake delivered solid organic production growth in the quarter while continuing to demonstrate capital discipline and efficiency. As a result, we are increasing our 2014 production outlook while leaving our capital budget unchanged. In the 2014 second half, we plan to connect approximately 35% more wells to sales than we connected in the first half of the year. As our pace of well connections accelerates, we expect our production growth trajectory will increase accordingly and we anticipate our year-end 2014 exit rate will exceed 730,000 boe per day."
Operational Update
Chesapeake has updated each of its E&P sectors for the second quarter, which can be accessed below:
Chesapeake's Utica Results Skyrocket; Marcellus Also Posts Gains
Chesapeake Augments Eagle Ford Fleet; Talks Improvements
Chesapeake Brings 56 Mid-Continent Wells to Sales in 2Q
Chesapeake Lengthens Laterals at Gas-Heavy Haynesville Acreage
Chesapeake Details Powder River Asset Exchange, Future Plans
2014 Second Quarter Production
Chesapeake’s daily production for the 2014 second quarter averaged 694,650 barrels of oil equivalent (boe), a year-over-year increase of 13%, adjusted for asset sales. Average daily production consisted of approximately 113,400 barrels (bbls) of oil, 84,300 bbls of NGL and 3.0 billion cubic feet (bcf) of natural gas.
On an adjusted basis, 2014 second quarter average daily oil production increased 12% year over year, average daily NGL production increased 72% year over year and natural gas production increased 7% year over year.
Chesapeake is increasing the midpoint of its expected 2014 daily production rate outlook by 10,000 boe, or 1.5%, to between 685,000 and 705,000 boe per day. The increase in production is partially attributable to better production trends in the first half of 2014, coupled with an increase in forecasted well connections during the second half of 2014. A change in the timing of announced divestitures and the acreage swap with RKI Exploration & Production, LLC (RKI), as described below, also impacted the outlook increase.
Financials & Other Updates
For the 2014 second quarter, Chesapeake reported net income available to common stockholders of $145 million, or $0.22 per fully diluted share. Items typically excluded by securities analysts in their earnings estimates reduced net income available to common stockholders for the 2014 second quarter by approximately $90 million on an after-tax basis and are presented on Page 13 of this release. The primary component of this reduction to net income was a loss on the repurchase of debt securities associated with our April 2014 debt refinancing, partially offset by net gains on sales of fixed assets. Adjusting for these items, 2014 second quarter net income available to common stockholders was $235 million, or $0.36 per fully diluted share, which compares to adjusted net income available to common stockholders of $265 million, or $0.51 per fully diluted share, in the 2013 second quarter.
Adjusted ebitda was $1.277 billion in the 2014 second quarter, compared to $1.424 billion in the 2013 second quarter. Operating cash flow, which is cash flow provided by operating activities before changes in assets and liabilities, was $1.269 billion in the 2014 second quarter, compared to $1.366 billion in the 2013 second quarter. The year-over-year decreases in adjusted ebitda and operating cash flow were primarily the result of higher production and lower per unit costs, which were more than offset by the effect of lower realized oil, natural gas and natural gas liquids (NGL) prices.
Recent Strategic Transactions
On June 30, 2014, Chesapeake completed the spin-off of its oilfield services business into an independent publicly traded company, Seventy Seven Energy Inc. After the close of business on June 30, 2014, Chesapeake distributed to its shareholders one share of SSE common stock for every 14 shares of Chesapeake common stock held as of June 19, 2014, the record date. In conjunction with the spin-off, Chesapeake removed $1.1 billion of debt associated with SSE from its balance sheet, the effect of which was reflected as of June 30, 2014.
On July 29, 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 $1.26 billion to repurchase 1,060,000 preferred shares of CHK Utica. The transaction retired Chesapeake’s highest cost leverage instrument and eliminated approximately $75 million in annual cash dividend payments to third-party preferred shareholders.
On July 29, 2014, Chesapeake announced that it had entered into an agreement with RKI to exchange Chesapeake's nonoperated northern Powder River Basin (PRB) acreage for RKI's southern PRB acreage that is operated by Chesapeake. The transaction is expected to increase Chesapeake's PRB holdings by 66,000 net acres and average working interest from 38% to 79%. In addition to the exchange of acreage, Chesapeake will pay RKI $450 million in cash. The transaction, which is subject to certain closing conditions including the receipt of third-party consents, is expected to close in August 2014.
Asset Sales Update
During the 2014 second quarter, the company received total proceeds of approximately $675 million from the sale of noncore assets, including $362 million of net proceeds from the sale of compression assets to Exterran Partners, L.P.
In the 2014 second half, Chesapeake expects to receive more than $700 million in proceeds from various asset sales that have closed, or are underway. These transactions are expected to include noncore E&P assets in southwestern Pennsylvania, South Central Oklahoma, East Texas and South Texas, as well as additional compression assets and other miscellaneous real estate and equipment.
Chesapeake continues to pursue opportunities to high-grade its portfolio while focusing on assets that best align with its strategy of profitable growth from captured resources. The company believes its targeted asset dispositions will be value-accretive and enable it to further reduce financial complexity and lower overall leverage.
Capital Spending and Cost Overview
Chesapeake's total capital expenditures in the 2014 second quarter were approximately $1.315 billion, of which drilling and completion capital expenditures were approximately $1.131 billion. This level of expenditures represents an increase of approximately $402 million, or 55%, compared to the 2014 first quarter. The sequential increase is primarily the result of higher drilling and completion activity during the 2014 second quarter, including a significant increase in nonoperated drilling and completion activity.
In the 2014 second quarter, net expenditures for the acquisition of unproved properties and geological and geophysical costs were approximately $54 million. Other capital expenditures were approximately $130 million, of which $79 million was attributable to capital spending in its former oilfield services business prior to the June 30, 2014 spin-off. In addition, the company purchased rigs and compressors previously sold under long-term lease arrangements for approximately $82 million as part of its strategic initiative to reduce complexity and future commitments as well as to facilitate asset sales and the SSE spin-off.
Chesapeake spud a total of 324 gross wells and connected 275 gross wells to sales during the 2014 second quarter, compared to 299 gross wells spud and 249 gross wells connected to sales during the 2014 first quarter. In the second half of 2014, the company plans to connect to sales approximately 35% more wells than were connected in the first half of 2014, and anticipates investing approximately 40% more capital on drilling and completions. The company reiterates its 2014 full-year total capital expenditure guidance of $5.0 - $5.4 billion, excluding capitalized interest.
Chesapeake's focus on cost discipline continued to generate reductions in production and general and administrative (G&A) expenses. Average production expenses during the 2014 second quarter were $4.46 per boe, a decrease of 5% from the 2013 second quarter. G&A expenses (including share-based compensation) during the 2014 second quarter were $1.43 per boe, a decrease of 17% from the 2013 second quarter. Interest expense (excluding unrealized gains or losses on interest rate derivatives) during the 2014 second quarter was $0.92 per boe, an 8% increase from the 2013 second quarter, as the company capitalized a smaller percentage of its interest cost due to a decrease in unevaluated natural gas and oil properties.