Chesapeake Energy (CHK) Posts Surprise Q3 Profit

Chesapeake Energy (NYSE: CHK) reported Q3 EPS of $0.09, $0.12 better than the analyst estimate of ($0.03). Revenue for the quarter came in at $2.28 billion versus the consensus estimate of $2.18 billion.

Chesapeake reported a net loss available to common stockholders of $1.197 billion, or $1.54 per share, while the company's ebitda for the 2016 third quarter was a loss of $801 million. The primary drivers of the net loss were Barnett Shale exit costs of approximately $616 million and a noncash impairment of the carrying value of Chesapeake's oil and natural gas properties of approximately $433 million, largely resulting from decreases in the trailing 12-month average first-day-of-the-month oil and natural gas prices as of September 30, 2016, as compared to June 30, 2016. Adjusting for these and other items that are typically excluded by securities analysts, the 2016 third quarter adjusted net income available to common stockholders was $27 million, or $0.09 per common share, while the company's adjusted ebitda was $421 million in the 2016 third quarter. These adjusted results include a recorded gain of $146 million of proceeds related to the sale of a long-term natural gas supply contract which was sold in the 2016 third quarter and reflected in the company's marketing, gathering and compression revenues.

Midstream Update

In addition to the gas gathering agreement termination with Williams in the Barnett Shale, Chesapeake renegotiated its existing cost-of-service gas gathering agreement with Williams in the Mid-Continent operating area to a fixed-fee arrangement in exchange for a $66 million payment in the 2016 third quarter. This new agreement became effective July 1, 2016.

The company also accelerated the value of a long-term natural gas supply contract in the 2016 third quarter by selling rights under a long-term gas supply agreement for $146 million in cash proceeds. In connection with this sale, the company reversed a $280 million derivative asset which was reflected as an unrealized hedging loss during the current quarter.

In October 2016, Chesapeake announced that it signed a letter of intent to restructure its natural gas gathering and service agreement in its Powder River Basin operating area with Williams and Crestwood Equity Partners L.P. (NYSE: CEQP). The restructured services are expected to replace the current cost-of-service arrangement and improve economics which support increased development across an expanded area of dedication in the region. Subject to board approvals from all three companies of the definitive agreement, the restructured services are to become effective January 1, 2017, for a 20-year term.

Operations Update

Chesapeake's average daily production for the 2016 third quarter was approximately 638,100 boe and is further detailed in the table below. For the 2016 fourth quarter, the company expects its average daily production to range between 550,000 and 570,000 boe (including approximately one month of production from the Barnett Shale assets). With average daily oil production of approximately 91,000 barrels per day for the month of October 2016, the company expects its average daily oil production to range between 90,000 and 95,000 barrels per day for the 2016 fourth quarter.

Chesapeake currently expects its exit rate production to grow significantly over the next two years. The company is currently projecting an exit-to-exit increase in total production from the fourth quarter of 2016 to the fourth quarter of 2017 of approximately 7%, adjusted for asset sales. More importantly, the company is projecting an exit-to-exit increase in its oil production from the fourth quarter of 2016 to the fourth quarter of 2017 of approximately 10%. For 2018, the company is currently projecting an increase in its total production from the fourth quarter of 2017 to the fourth quarter of 2018 of approximately 15%, primarily driven by an exit-to-exit increase in its oil production from the fourth quarter of 2017 to the fourth quarter of 2018 of approximately 20%. Chesapeake's projected growth rates are preliminary and its flexible capital expenditure program will be adjusted based on prevailing market conditions and are subject to final capital allocation decisions for 2017 and 2018.

Chesapeake is currently utilizing 11 drilling rigs across its operating areas, three of which are located in the Eagle Ford Shale, three in the Haynesville Shale, three in the Mid-Continent area and two rigs in the Utica Shale. Chesapeake plans to utilize its existing rigs through year-end and plans to drill 50 to 60 wells and place approximately 100 to 110 wells on production in the 2016 fourth quarter.

For earnings history and earnings-related data on Chesapeake Energy (CHK) click here.

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