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Chesapeake Energy releasing second quarter reports

By Bob Downing Published: August 1, 2013

A press release today from Okalhoma-based Chesapeake Energy Corp.:

It will provide an update later today.

Here is the statement:

OKLAHOMA CITY--(BUSINESS WIRE)--Aug. 1, 2013-- Chesapeake Energy Corporation (NYSE:CHK) today 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
  • Conference call at 9:00 am EDT today; dial-in 913-312-0968, passcode 3533928

Chesapeake reported net income available to common stockholders of $457 million, or $0.66 per fully diluted share. 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 $1.370billion, 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.”

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. (NYSE:XCO) 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 (NYSE:SEMG) 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.

Operational Update

The company continues to achieve strong operational results in its most active plays, as highlighted below.

Eagle Ford Shale (South Texas): In the Eagle Ford Shale play, Chesapeake connected 140 wells to sales during the 2013 second quarter, which was substantially more than the 111 wells connected during the 2013 first quarter. Net production during the 2013 second quarter averaged approximately 85,000 barrels of oil equivalent (boe) per day (190,000 gross operated boe per day). This represents an increase of 135% year over year and 14% sequentially. The average peak daily production rate of the 140 wells that commenced first production during the 2013 second quarter was approximately 900 boe per day. Approximately 66% of the company’s Eagle Ford production during the 2013 second quarter was oil, 14% was NGL and 20% was natural gas.

Chesapeake is currently operating 15 rigs in the Eagle Ford and, due to reduced cycle times and the sale discussed above, plans to reduce its operated rig count to 10 by the end of 2013. Average spud-to-spud cycle time during the quarter was 16 days, down from 21 days year over year. As of June 30, 2013, Chesapeake had drilled a total of 963 wells in the Eagle Ford, which included 795 producing wells, 24 additional wells waiting on pipeline connection and 144 wells in various stages of completion.

Utica Shale (eastern Ohio, Pennsylvania, West Virginia): Net production from the Utica Shale play averaged approximately 85 million cubic feet of natural gas equivalent (mmcfe) per day during the 2013 second quarter, an increase of 48% sequentially from the 2013 first quarter. The average peak daily production rate of the 42 wells that commenced first production in the Utica during the 2013 second quarter was approximately 6.6 mmcfe per day.

Chesapeake is currently operating 11 rigs in the Utica, which it plans to reduce to 10 rigs by year end. Average spud-to-spud cycle time during the quarter was 18 days, down from 26 days a year ago. As of June 30, 2013, Chesapeake had drilled a total of 321 wells in the Utica, which included 106 producing wells, 93 additional wells waiting on pipeline connection and 122 wells in various stages of completion.

Greater Anadarko Basin (Oklahoma, Texas Panhandle, southern Kansas): Chesapeake continues to generate steady liquids production growth in the Greater Anadarko Basin primarily from five plays: the Mississippi Lime, Granite Wash, Cleveland, Tonkawa and Hogshooter. Aggregate net production from these plays during the 2013 second quarter averaged 126,000 boe per day (192,000 gross operated boe per day), an increase of 43% year over year and 11% sequentially. The average peak daily production rate of the 123 wells that commenced first production in the Greater Anadarko Basin during the 2013 second quarter was approximately 800 boe per day. Approximately 38% of the company’s Greater Anadarko Basin production during the 2013 second quarter was oil, 18% was NGL and 44% was natural gas.

Chesapeake is currently operating 26 rigs across these plays, which it plans to reduce to 19 rigs by year end. As of June 30, 2013, the company had an inventory of 58 drilled but uncompleted and/or unconnected wells in the Greater Anadarko Basin.

Marcellus Shale (Pennsylvania, West Virginia): The company’s production from the Marcellus Shale continued to grow during the 2013 second quarter, benefiting from the availability of downstream takeaway capacity and the completion of wells in backlog. Chesapeake connected 131 wells to sales during the 2013 second quarter, which was substantially more than the 52 wells connected during the 2013 first quarter. Approximately 2% of the company’s Marcellus production during the 2013 second quarter was oil, 3% was NGL and 95% was natural gas.

During the 2013 second quarter, Chesapeake’s average daily net production in the northern dry- gas portion of the Marcellus was approximately 780 mmcfe per day (1,810 gross operated mmcfe per day), an increase of 58% year over year and 11% sequentially. The average peak daily production rate of the 79 wells that commenced first production during the 2013 second quarter in the northern Marcellus was approximately 9 mmcfe per day.

Chesapeake is currently operating five rigs in the northern dry-gas portion of the play and anticipates maintaining this activity level for the remainder of 2013. Average spud-to-spud cycle time during the 2013 second quarter was 29 days, down from 31 days a year ago. As of June 30, 2013, Chesapeake had an inventory of 144 drilled but uncompleted and/or unconnected wells in the northern Marcellus.

During the 2013 second quarter, Chesapeake’s average daily net production in the southern wet-gas portion of the Marcellus was approximately 208 mmcfe per day (355 gross operated mmcfe per day), an increase of 56% year over year and 23% sequentially. The average peak daily production rate of the 52 wells that commenced first production during the 2013 second quarter in the southern Marcellus was approximately 6.5 mmcfe per day.

Chesapeake is currently operating three rigs in the southern wet-gas portion of the play, which it plans to reduce to two rigs by year end. Average spud-to-spud cycle time during the 2013 second quarter was 21 days, down from 33 days a year ago. As of June 30, 2013, Chesapeake had an inventory of 76 drilled but uncompleted and/or unconnected wells in the southern Marcellus.

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