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Ohio Utica Shale

Sterne Agee analysts on Chesapeake Energy's quarterly report

By Bob Downing Published: August 6, 2014

From New York analyst Tim Rezvam and Truman Hobbs on Chesapeake Energy's second quarter 2014 report that they called "a miss."

Price: $26.83
Price Target:

Cash Costs Drive Miss to Our Below-Consensus Estimates. Pro Forma Net Debt Remains High. '15 Growth Outlook Brightens.

Our Call
CHK reported a slight EPS miss this morning, but any disappointment should be mitigated by a 1.5% increase to 2014 production guidance and 2014 exit-rate guidance of 730 mboe/d that suggests consensus 2015 production of 732 mboe/d is likely far too conservative. Shares could come under pressure after showing relatively resilient QTD performance (-11%) in a weak tape for the industry, but we believe a muted reaction is warranted following a positive update to 2015 growth.

• 2Q Earnings Lags Us and Consensus. 2Q adjusted EBITDA of $1.28 billion compared to our estimate of $1.32 billion and consensus of $1.35 billion. 2Q adjusted EPS of $0.36 lagged us at $0.42 and consensus at $0.44. Variance came from higher than expected cash costs (production taxes and G&A) and a higher effective tax rate, which more than offset the impact of higher oil and natural gas production. Cash unit expense of $7.02/boe was 6% higher than our estimate of $6.65/boe.

• Update on Asset Sale/Strategic Transactions Expected in 2014. The company updated its list of sources/uses of cash. In 2Q, the company removed $1.1 billion of debt with the Seventy Seven Energy (SSE, $22.85, NR) spin and closed on $675 million of non-core asset sales. Subsequent to quarter-end, the company plans to close on another $700 million of asset sales, pay $450 million to consolidate its Powder River Basin assets and pay $1,260 million to repurchase CHK Utica preferred equity shares. In total, we now estimate pro forma net debt of $11.1 billion and a pro forma net debt/TTM EBITDA multiple of 2.1x.

• Production Growth Outlook Improves. 2Q production averaged 695 mboe/d, 2% above both our 681 mboe/d estimate and consensus of 683 mboe/d. Crude production of 113 mb/d and gas production of 2.98 Bcf/d were both 4% higher than expected, while NGL production of 85 mb/d was 8% lower than expected. Strong 2Q volumes led to the company nudging up full-year production guidance by 1.5% to 695 mboe/d. The company provided exit-rate guidance of 730 mboe/d, which is well above our current 1Q15 production estimate of 722 mboe/d. In fact, Chesapeake's 2014 exit rate number is almost on top of consensus 2015E production of 732 mboe/d and our estimate of 734 mboe/d. We hope to get clarity on this topic on today's call.

• Operational Highlights. The company reiterated its plan to grow to 7-9 rigs in the Powder River Basin in 2015, acknowledging that gas processing plant delays will be a drag on production growth until 4Q14. The company confirmed it added a rig to test the dry gas window of the Utica Shale in northern West Virginia. In the Ohio Utica Shale, the company still has a large, 210 well inventory of wells awaiting completion or being turned to sales. The recent addition of additional gas processing should result in more wells being turned to sales in 2H14, reducing that backlog. In the Haynesville Shale, 2Q production averaged 508 mmcf/d, a 3% sequential increase.

Any Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification, Investment Banking, Ratings Definitions, and any potential conflicts of interest may be found by clicking on the report link below. Past performance is no guarantee of future results.
CHK Note

For the latest company report:
CHK Company Report




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