Chesapeake Energy Climbs Despite First-Quarter Revenue Miss – TheStreet.com

Chesapeake Energy Climbs Despite First-Quarter Revenue Miss - TheStreet.com
3 Numbers From Chesapeake Energys Q1 Report That You Wont Want to Miss
Chesapeake Energys (NYSE:CHK) first-quarter results didnt come in quite as good as analysts expected. Overall, the companys adjusted earnings fell short of the consensus estimate by $0.01 per share. That miss grabbed headlines and cooled off the companys red-hot stock.

However, underneath that headline number, Chesapeake delivered strong results that investors wont want to overlook. Here are three key figures from that report that show that the companys strategy is delivering results.

Chesapeake Energy closed its acquisition of WildHorse Resource Development during the quarter, which it renamed its Brazos Valley unit. The company immediately began integrating the assets, which included implementing some key changes. As a result, the company has eliminated an average of $500,000 in costs per newly drilled well, driven by its ability to drill faster and complete more fracking stages per day. On top of that, the early production results from wells completed using the companys proprietary methods have come in above expectations.

Chesapeake anticipates that it can drive out more costs as it continues integrating these assets. It has already achieved $1 million in savings on some wells. This quick success in integrating Brazos Valley increases confidence that this transformational transaction will deliver the expected growth in high-margin oil as well as the anticipated cost savings.

Chesapeake Energy pumped out an average of 109,000 barrels of crude oil per day (BPD) during the quarter. Thats up 18% overall, and 13% after adjusting for the sale of its Utica shale assets and the acquisition of WildHorse Resource Development. Overall, crude oil accounted for 22% of the companys total production.

The primary driver of the surge in oil output is the companys position in the Powder River Basin (PBR). Oil output in that region rocketed nearly 129% to 16,000 BPD even though the company battled significant weather issues during the quarter. The company currently has six rigs drilling in the PBR, which should fuel rapid oil growth throughout the year.

Chesapeake Energy remains on track to expand its oil production 32% this year, which will improve the mix to 26% of total output.

Chesapeake Energy has had a dual focus to improve its profitability: drive down costs and expand its high-margin oil output. The company was successful in both areas during the first quarter, as oil output jumped 18% while cash costs fell 14% compared to the year-ago period. Those dual fuels helped boost its operating margin to $15.50 per barrel. That was its highest level in four years.

That number should continue expanding as the company maintains its dual focus on growing higher-margin oil output while driving down costs. One area where margins should soar is in the Powder River Basin. Chesapeake Energy signed an agreement earlier this year with a midstream company thats building out an oil gathering system to support the companys production in the region, which should reduce transportation costs by 25%. Initiatives like that one should help drive a 60% increase in its PBR margin to $20.50 per barrel of oil equivalent for the full year.

Chesapeake Energys acquisition of Wildhorse Resource Development is already paying dividends. Not only did that deal provide an immediate boost to its oil output but the company has started implementing changes that are having a noticeable impact on well costs. Meanwhile, its Powder River Basin assets continue to perform well, which has the company on track to continue growing oil production and margins. That keeps the Chesapeake on pace with its long-term strategic goals of eventually generating free cash flow so that it can further improve its financial profile.

Chesapeake Energy Corp.s leadership team said Wednesday it couldnt be happier with its acquisition of WildHorse Resource Development Corp.

That companys assets in the Eagle Ford Shale field, incorporated into Chesapeake earlier this year to become its Brazos Valley business unit, helped propel the firms first-quarter operational and financial results to a point to where it saw its highest operating margin per barrel of oil equivalent since 2014, officials said.

Doug Lawler, Chesapeakes president and CEO, said Wednesday early results the company has seen from recent wells it has drilled and completed there are encouraging.

It demonstrates our capability to apply our capital and operating efficiency to immediately transform a new asset in our portfolio, Lawler said, adding that Chesapeake now expects the project to be cash flow positive this year.

In its earnings release, Chesapeake stated it so far has eliminated about $500,000 in costs per Eagle Ford Shale well, primarily by drilling and completing the wells more quickly than WildHorse could.

Chesapeake also reported early production rates from some of the first wells in the field it drilled and completed there were stronger than anticipated.

Those improvements, combined with continued production growth from its Powder River Basin operations, boosted Chesapeakes average oil production for the quarter to 109,000 barrels daily and cemented its plans to grow the oil mix of its production stream to about 26% by the end of this year.

On the financial side for the quarter, Chesapeake reported a net loss of $44 million, or 3 cents per share, on a total income of nearly $2.2 billion and $676 million in adjusted earnings before interest, taxes, depreciation, amortization and exploration expenses.

The companys results, however, were calculated using a different method than what Chesapeake previously had used, officials said.

Wednesdays results, they said, were reached through using successful-efforts accounting, which allows a company to capitalize only those expenses associated with successfully locating new oil and natural gas reserves.

It also provided first-quarter results using the full-cost accounting method it previously used, where companies capitalize all operating expenses related to locating new oil and gas reserves, regardless of the outcome.

Using that methodology, the company reported it earned a net income of $156 million, or 11 cents per share, on the total revenues of nearly $2.2 billion and $688 million in adjusted earnings before interest, taxes, depreciation, amortization and exploration expenses.

In the first quarter of 2018 (recast using successful efforts method of accounting), the company reported it lost $6 million, or a penny a share, on a total income of about $2.5 billion and $717 million in adjusted earnings before interest, taxes, depreciation, amortization and exploration expenses.

The reason that two different methods exist for recording oil and gas exploration and development expenses is that regulators are divided on which method they believe best achieves transparency around a companys earnings and cash flows.

The Financial Accounting Standards Board, which establishes and governs generally accepted accounting principles, supports using the successful efforts method of accounting.

The Securities and Exchange Commission, which regulates the financial reporting format and content of publicly traded companies, supports continuing to use the full cost accounting method.

Regardless of which method of accounting was used, Lawler was upbeat about the companys first-quarter results on Wednesday.

The underlying business continues to see excellent progress, Lawler said, in closing remarks he made to analysts during a call to discuss the results.

While he agreed the company had made a great deal of improvement, he also observed he believes it can propel itself to ever-greater accomplishments.

I believe the companys performance continues to reflect a well-run organization that will continue to provide more value to shareholders in the future, Lawler said.

A Chesapeake Energy Corp. employee uses a thermal imaging camera to look for methane emissions at a well site in Oklahoma. [Photo provided]


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