Highlights From CHK's Q3 Conference Call: Daily Production Hit New Quarterly Record

November 3, 2009 12:10 PM EST

Chesapeake Energy (NYSE: CHK) reports Q3 EPS of $0.70, 5 cents better than the analyst estimate of $0.65. Revenue for the quarter was $1.8 billion, which compares to the estimate of $1.96 billion. Shares are flat on the session.

Highlights From CHK's Q3 Conference Call:

• (CEO) On the operational side our daily production hit a new quarterly record for production at a daily rate of 2.483 bcfe.
  
• In October our net production has already been as high as 2.6 bcfe, so we are on track to continue capturing gas production market share in the months and years ahead.
  
• By year end 2010, we expect our daily net production to exceed 2.8 bcfe and by year end 2011, we expect our daily net production to exceed 3.1 bcfe, which would be an increase of 25% from our third quarter 2009 average daily production.
  
• Production increases continue to be led by growth from our big four shales and Granite Wash plays. We believe they will be leading the production increases at Chesapeake for at least the next 20 quarters and probably for more than the next 40 quarters.
  
• Excluding price related recessions, it now looks like we will easily exceed our previously stated year end 2009, '10 and '11 goals of 14, 16 and 18 tcfe respectively of proved reserves.
  
• Since January 1, 2008, we have monetized approximately $12.5 billion of assets that had a cost basis to us of $2.2 billion, generating a gain in shareholder value of $10.3 billion over the past seven quarters from asset monetization.
  
• As a reminder, we have the capability to hedge almost four years of future natural gas production. We will begin hedging some of that future production when the opportunities arrive to increase shareholder value through hedging rather than limit shareholder value creation through hedging which we believe some in the industry have done recently.
  
• (CFO) We do believe that we'll probably -- we are pretty close to the bottom and Steve Dixon and his operating staff have worked hard to layer in numerous service company arrangements that will lock in at least 70% of our cost over the next 12 to 24 months.
  
• Second, we continue to entertain unsolicited exchange offers for some of our convertible debt and retired 155.3 million of face amount this quarter at an average discount of about 28% to par in exchange for CHK stock that was issued at an equivalent price of just over $36 per share. Today, that brings us about $1.1 billion of debt extinguished in the last four quarters in exchange for CHK shares.
  
• Finally, we ended the quarter with $520 million in cash and about $2.6 billion of undrawn capacity in our free bank credit facilities.
  
• (Q&A) A quick question with respect to the hedging that you outlined in this call and previously that you are taking the fact of being offensive versus defensive with respect to laying on hedges. Barring the attractive carries you guys have in the Fayetteville Marcellus, would you think about that a little bit differently and irregardless of those at what price would you look at considering hedging? (A)I don't think our hedging is impacted by our carries. Our hedging is impacted by long develop strategy that Mark and I have had and Jeff has joined us in recent years in trying to hedge prices that create value rather than limit value creation, and I think, some companies that for example wouldn't hedge $8 gas in 2010 a year or two ago. It's a little curious that they are eager to hedge $5.50 or $6 gas here lately. I read if the markets and Jeff has a very extensive and we think accurate production model for the entire U.S. and it includes Canadian input as well. We think that leads us to the inescapable conclusion that gas production will be down significantly in months and quarters ahead and we think that will present us with ample opportunities. And so, yeah, if we wanted to just go hedge, we can hedge but we think there's more to hedging than just simply executing the hedge. We think you need to do it at the right time and we haven't felt like the right time has arrived yet.
  
• And then, kind of thinking about Jeff's model that you highlight, if we look at the most recent 914 data, obviously we're seeing kind of lumpy results month over month. Any thoughts or any changes regarding sort of the anticipated rollover that you've outlined for 2010 as the real rollover year versus 2009 and do you equate that, the fact that it's been pushed out a little bit to efficiencies or is there some sort of high grading of portfolios, just kind of your conceptual thoughts, that would be helpful. (A)I would give you a couple and turn it over to Jeff for his analysis. But I think we've been reasonably consistent over the past six months that we thought we would see declines in the fourth quarter of 2009 that you're not going to see public confirmation of that until 2010. But I think Jeff's model for sometime has shown a bottoming of gas production on a year-over-year basis in the first, let's call it the kind ofthe late first quarter early second quarter of 2010, and then the decline continue throughout 2010 to get an absolute trough of production sometime in the first half of 2011.So why is it taking longer for some of this stuff to show up? I think the same as what we saw in Canada a few years ago. It just takes a long time for uncompleted wells to work through the system, and I think that's what's happening today, and obviously investors have been very clued into this phenomenon of those voluntarily and involuntarily, uncompleted or wells that have not yet been hooked up. And that backlog, we think, has largely cleared itself. We think it's cleared itself at our company and suspect that it has in the industry. So I'll turn it over to Jeff for further commentary.(A)Yeah, just a few other comments there. Frankly, we are still trying to reconcile the numerous revisions that came out on the last round of the EIA 914 data and it's not entirely clear if it fully represents an accurate picture. However, if you take what's been observed in the weekly storage reports, it's clear that the market has tightened over the past several weeks, and you saw a resurgence of demand through low fuel prices in September, combined with some industry curtailment. I think, both of those are reversing themselves somewhat here in October but the trend with a much lower rig count should lead to substantial declines in production as we head into 2010 and we haven't seen any new data to discourage that yet.
  
• Do you think from a financial modeling standpoint and I know this is how the market thinks about it you get better value if you get more cash proceeds up front post of carriers, where then it hits your balance sheet immediately or does that even factor into your thought process other than just finding cost lowering over couple of years? (A)I think that the balance that we have is one of -- at least two elements to it. The most obvious is that the drilling carries the way that we've structured them are tax efficient and deductible for the pain party and non-taxable income for us being carried as opposed to cash which would be a taxable transaction, and in fact 2008 we had some tax leakage that we are now recovering. So that is one pretty solid element. The other part of the strategy I think that is important from an investor standpoint, our partners, we are investing or they are investing in plays that are huge in size. Sometimes not well-defined and so the carries actually benefit them as well in the sense that they get to spend their money basically to develop proved reserves as their drilled in large areas. And I think that has increased the total value to us as well.

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