Chesapeake registers a profit, despite troubles

Chesapeake Energy Corp. boosted production and reported better-than-expected earnings for the first quarter, but major questions remain as the company struggles to overcome a cash shortfall.

The nation’s second-largest natural gas producer after Exxon Mobil Corp. said Wednesday that it pulled in $15 million in net income, up from a loss of $71 million in the first quarter of 2012 when natural gas prices were in the midst of a free fall. Its first quarter revenues jumped to $3.4 billion, up 42 percent from the same period in 2012.

Chesapeake’s adjusted earnings before interest, taxes, depreciation and amortization were $1.1 billion, up 35 percent compared with the first quarter of 2012.

Its adjusted earnings per share of about 30 cents were about 20 percent higher than analysts expected, though some still had questions about the company’s strategy for overcoming a debt burden that now stands at $13.4 billion.

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“All told, we view the quarterly result as an incremental positive for Chesapeake, but we still need more clarity on how the company will get itself to a position of balance sheet strength to be able to exploit its asset base unfettered by liquidity concerns,” analyst James Sullivan, of Alembic Global Advisors, wrote in a note to investors.

Despite improving performance, Chesapeake still faces a $3.5 billion cash shortfall.

Executives said Wednesday that they will make at least $4 billion in sales this year to help the company stay afloat, with negotiations and deals in place for about $2 billion in sales so far.

But debt has kept Chesapeake in a precarious spot that could limit its growth, analysts said.
“My over-riding concern here is they need to sell assets to fund their budget and recent transactions have been pretty weak,” said Phil Weiss, an analyst for Argus Research Group.

Recent Chesapeake sales, including a $93 million purchase announced Tuesday by Houston-based Southwestern Energy for Marcellus shale leases, have sold at low values, said Neal Dingmann, an analyst with SunTrust Robinson-Humphrey.

“I think there’s still the uncertainty of: Are they going to basically be able to keep production growing as they would like in addition to raising the amount of cash they need to through the asset sales?” Dingmann said.

Chesapeake made production gains in the first three months of 2013, increasing overall output by 9 percent from the same period a year ago. It produced the equivalent of about 4 billion cubic feet of natural gas per day in the first quarter, up 1 percent from the fourth quarter of 2012, the company said.

That daily production rate included a 56 percent percent jump in Chesapeake’s oil production from the same period a year ago. The company now puts out about 103,000 barrels of oil per day, a figure that is up 6 percent from the fourth quarter of 2012.

Oil now makes up 16 percent of Chesapeake’s production, up from 11 percent in the first quarter of 2012. Natural gas accounts for 76 percent of Chesapeake’s production, down from 81 percent a year ago.

Improved production and asset sales will help the company reduce its debt, Chesapeake Chief Financial Officer Domenic J. Dell’Osso, Jr., said during a conference call with analysts Wednesday.

“The goal hasn’t changed, which is an absolute reduction in our debt,” Dell’Osso said.

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The company last year set a goal of cutting its debt to $9.5 billion, but failed to reach that target, allowing debt to balloon to more than $16 billion. Dell’Osso said Chesapeake is still aiming to push debt below $9.5 billion.

“We are noticeably being a little bit less specific of the precise timing of that because we want to preserve optionality,” he said, adding that asset sales will play a key role in the effort.

“We would use those proceeds from assets sales to reduce debt and we will absolutely get to that debt number, but we want to be a little bit cautious on exactly when we say it,” Dell’Osso said.

But it’s not clear if Chesapeake will be able to maintain production growth after it sells of more assets, Dingmann said.

Chesapeake made progress with its production expenses, which had been a major source of criticism over the last year. Its expenses for production in the first quarter fell 19 percent compared with the same period a year ago, the company reported.

The lower costs had much to do with a more focused strategy and has made the company more efficient, the company said.

“We are beginning to see the benefits of our operational strategy shift from identifying and capturing new assets to developing our extensive existing assets and entering a new era of shareholder value realization,” Steven C. Dixon, Chesapeake’s acting CEO, said during a conference call with analysts. “Our operational focus on the core of the core is enabling our drilling program to increasingly target the best reservoir rock in each of our key plays. We are capitalizing on pad drilling efficiencies wherever possible and leveraging our substantial investments in roads, well pads, gathering lines, and compression and processing facilities.”

Chesapeake ran an average of 83 drilling rigs in the first quarter, with most of its productivity coming out of the Eagle Ford shale play and the Greater Anadarko basin. The company’s average time spent to drill a well in the Eagle Ford, measured as the time a rig spends between the start of wells, was 18 days, down from 25 days a year ago.

The Oklahoma City-based company said it incurred an $83 million charge because of employee and retirement expenses that came about because of recent employee buyout deals and a separation agreement with its co-founder and former CEO Aubrey McClendon.

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Chesapeake drew intense criticism over the last year because of a strategy that left with falling revenues and more than $16 billion in debt. The company’s natural gas-heavy production had left it in a bind when prices nearly collapsed.

Instead of cutting back its operations, Chesapeake embarked on a debt-fueled strategy to grow its production, resorting to asset sales to help pay off loans.

That effort, along with revelations that former CEO McClendon had received questionable perks that created conflicts of interest with Chesapeake’s lenders, inspired a shareholder backlash and eventually led to McClendon’s departure from the company.

McClendon was also accused of engaging in collusion with Canadian natural gas giant Encana Corp. to depress lease prices in Michigan.

The company is under investigations from the U.S. Department of Justice and the Securities and Exchange Commission related to the allegations. Chesapeake has said its internal reviews of the matters have shown no evidence of wrongdoing.