“It’s a new day at CHK,” wrote Chesapeake Energy (NYSE:CHK) in its third-quarter investor presentation, “we have reached an inflection point.” This, although tucked away inconspicuously at the bottom of a slide, is not an idle comment. The U.S. oil and gas company, the second-largest producer of natural gas in the country, reported third-quarter results to support the claim. Shares, which closed Tuesday at $28.14 (already up more than 51 percent for the year), climbed as much as 3 percent in early trading on Wednesday after the earnings release.
Financially, it was a very strong quarter for Chesapeake. Total revenues increased 63.9 percent on the year to about $4.9 billion, far exceeding the mean analyst estimate of $3.49 billion. Adjusted earnings grew 330 percent on the year to 43 cents per diluted share, consistent with the mean analyst estimate. Revenue collected per thousand cubic feet equivalent — a metric used to reconcile natural gas (measured in thousands of cubic feet) and crude oil (measured in barrels), condensate, and liquid natural gas — increased 68 percent on the year to $13.08.
Chesapeake reported adjusted EBITA (earnings before interest, tax, and amortization) increased 29 percent on the year to $1.3 billion, and operating cash flow increased 22 percent on the year to $1.4 billion. In line with the company’s plan to reduce both leverage and complexity of operations, total capital expenditures declined 57 percent on the year to $1.5 billion. Asset sales this year to date are $4.2 billion, on track, and the company’s liquidity increased to $5.2 billion.
While Chesapeake did reduce drilling and completion capex significantly, where the firm has really saved money over the past few years is in leasehold capex. Chesapeake now devotes over 80 percent of its total capex to drilling and completion, a significant improvement from the approximately 50 percent ratio held between 2010 and 2012.
If Chesapeake had a strong financial quarter, it had an outstanding operational quarter. Total production of oil and gas equivalents fell 2 percent on the year to 4.0 billion cubic feet per day, but this headline reduction masks a move toward a more favorable mix of production. Total gas production decreased 10 percent on the year (driving the headline decrease) to 3.0 bcf/d.
Meanwhile, oil production increased 23 percent on the year to 120,000 barrels per day, while natural gas liquids production increased 31 percent on the year to 58.5 million barrels per day. Liquids are generally more profitable than gas, and Chesapeake’s liquid production as a share of total increased from 21 percent to 27 percent in the third quarter. For the year, Chesapeake is projecting total oil production to increased 31 percent to 41 million barrels, with daily production increased 3 percent on the year to 3,985 billion cubic feet equivalent per day.
Since June 17, when CEO Doug Lawler took charge of the company, Chesapeake has evolved into a cost-cutting machine, reducing leverage and shedding complexity like the toxic waste it had become for the company. Although often credited for Chesapeake’s rise to become the second largest natural gas producer in the U.S., the company’s former boss, Aubrey McClendon, grew the firm at enormous cost. When he left in January of 2013, he had saddled the company with as much as $12 billion in debt, and was largely responsible for those enormous leasehold capex expenses seen earlier, which Lawler has taken a hatchet to.
The cost cutting plan has reduced headcount by about 1,200 at the company, but the operation to date has proven to be enormously successful. Shares have climbed nearly 70 percent this year to date, dramatically outpacing larger industry peers such as Exxon Mobil (NYSE:XOM), BP (NYSE:BP), and Chevron (NYSE:CVX).
Exxon Mobil has climbed just 3.7 percent this YTD on the stock chart, largely thanks to relatively flat growth. Net income at Exxon Mobil fell 18 percent on the year last quarter, and the firm has pretty much suffered from sideways growth on the stock chart since 2011. Chevron has seem a little more action, growing about 7.3 percent on the stock chart this year to date, but third-quarter earnings also fell on the year thanks primarily to reduced margins for refined products (a problem that has plagued many oil and gas companies recently). Chevron is investing heavily in its major capital projects, and is looking at a few major startups in 2014.