Chesapeake Fails to Impress, but Shares Rise Anyway

Chesapeake Energy Corp. (NYSE: CHK) reported third-quarter adjusted EPS of $0.06 and $3.39 billion in revenue after markets closed today. EPS for the same period a year ago totaled $0.76, and last year’s revenue totaled $3.32 billion. The results compare to the Thomson Reuters consensus estimates for EPS of $0.08 and $2.44 billion in revenue.

On a GAAP basis, EPS rose to $1.29, but that figure included several one-time items:

• A net after-tax gain on investments of $584 million in Chesapeake’s former midstream company
• Unrealized after-tax mark-to-market gains of $490 million from the company’s hedging programs
• A $148 million after-tax impairment charge

These three items alone added $926 million to the top line. Strip these out and the top line number falls to $2.46 billion, still slightly better than expected, but not 30% better.

Aubrey McClendon, the company’s embattled CEO, said:

In the 2012 third quarter, we anticipate entering into approximately $7.0 billion of asset sales, including the sale of Permian Basin and midstream assets. These transactions will be in addition to the $4.7 billion of asset sales completed in the 2012 first half. In combination with further asset sales planned for the 2012 fourth quarter, we have increased our plans for asset sales this year to a range of $13.0 to $14.0 billion, which will enable us to accomplish our planned 25% long-term debt reduction to $9.5 billion by year-end 2012 in accordance with our 25/25 Plan we announced in January 2011.

McClendon also said that Chesapeake was increasing its production guidance for 2013 “despite a $750 million decrease in our drilling and completion capital expenditure plans for next year.”

The company also noted that it plans to continue its focus on producing from liquids-rich fields:

During 2012 and 2013, the company projects that only approximately 16% and 8%, respectively, of its total drilling and completion capital expenditures will be invested in dry natural gas plays. The company continues to achieve strong operational results in its liquids-rich plays …

Depending on natural gas liquids, the prices of which are falling due to oversupply, may not be the company’s route to better profits. And as for asset sales, Chesapeake expects to complete about $11.7 billion by the end of the third quarter, and $13-$14 billion by year’s end. The company will still have plenty of assets, but most of the cash is going to pay down debts.

Shares are up nearly 4% in after-hours trading today, at $18.39 after closing at $17.70. The current 52-week range is $13.32 to $33.87. Thomson Reuters had a consensus analyst price target of $23.08 before today’s results were announced.

Paul Ausick