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Ohio Utica Shale

Analysts keep underperforming label on Chesapeake Energy

By Bob Downing Published: May 2, 2013

From analysts  Tim Rezvan and Truman Hobbs of Sterne Agee:

May 2, 2013

Exploration & Production

 

CHESAPEAKE ENERGY CORP. (NYSE: CHK) RATING: UNDERPERFORM

Price: $19.19

Price Target: $20.00

Analysts: Tim Rezvan, CFA / Truman Hobbs

Expense Initiatives Improve Earnings Outlook, But Asset Sale Uncertainty and Gas Hedges Remain '13 Headwinds.

Our Call
CHK continues to drive efficiencies with its drilling program, reporting strong 1Q results and providing bullish expense guidance. However, enthusiasm for incremental upside to 2013 CF (our new estimates suggest +$0.4B change to 2013 CF) should be measured, given a $4B funding gap in 2013 that remains half-filled. With a large sale of undeveloped leasehold in its best oil play necessary to avoid further leverage (net debt-to-TTM EBITDA of 3.3x), we reiterate our Underperform rating.

  • $2B Down, $2B to Go With Asset Sale Program, With (Potentially) 235K Eagle Ford Shale Acres on the Block. $0.6B of sales have closed, and the company has visibility on an additional $1.4B ($1B for Mississippi Lime JV, $0.3B for midstream sale, $0.1B on Marcellus acreage sale). With the company projected to hit the $2B mark on sales heading into 2H13, focus turns to the Eagle Ford Shale. Chesapeake stated it expected to retain 250K "core" acres across its 485K net acre position, suggesting 235K net acres could be sold, a larger figure than we anticipated. Without specificity on acreage amounts, locations, working interests, production or lease expiry, it is difficult to quantify potential proceeds, but we believe proceeds could exceed $1 billion.
  • Don't Expect Large Debt Paydown This Year. Chesapeake exited the quarter with $13.4B in net debt, versus $12.3B at year-end, and had drawn $832 million down on its $4B credit facility. Assuming $4.97B in discretionary cash flow and $4B in asset sales, we estimate the company could pay down its revolver and fully fund its capital program (we estimate an all-in capital program of $7.8B).
  • Eagle Ford Growth Drives 1Q Production Beat. Chesapeake drilled 91 Eagle Ford wells and turned 111 to sales in the first quarter, with an average initial production (IP) rate of 950 boe/d. The company plans to drill 300 wells and complete 400 wells this year, working through a large backlog of uncompleted wells. Results continue to become more attractive (targeted well cost of $6.5 million, estimated ultimate recovery (EURs) of 570 mboe, 30-80% IRRs). We would be supportive of other monetizations to ease liquidity constraints, given the strong returns in the play.
  • Increasing Estimates, But Reiterate Underperform and $20 PT. Strong operational traction leads us to increase 2013/2014 estimates. EBITDA estimates increase to $5.07/$5.86 billion from $4.66/$5.83 billion. 2013 EPS estimate increases to $1.40 from $1.11, while 2014 EPS of $2.21 is unchanged. Our $20 PT is based on a 5.4x 2014E EV/EBITDA multiple. We continue to believe that 2H13 and 2014 estimates could be at risk if lackluster asset sale proceeds force a reduction in the current drilling program.
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Ohio Department of Natural Resources' Division of Oil and Gas Resources Management State agency Web site.

ODNR Division of Oil and Gas Resources Management. State drilling permits. List is updated weekly.

ODNR Division of Geological Survey.

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Utica Shale, a compilation of Utica shale activities.

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Chesapeake Energy Corp,the Oklahoma-based firm is the No. 1 driller in Ohio.

Rig Count Interactive Map by Baker Hughes, an energy services company.

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Pipeline, blog from Pittsburgh Post-Gazette on Marcellus shale drilling.

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