Chesapeake Post Earnings: On the Stupid Side of Cheap

| About: Chesapeake Energy (CHK)

Chesapeake Energy Corp.'s (NYSE:CHK) top and bottom line recorded beats which is not surprising given that they pretty much alway beat. Raising 2007 and 2008 production guidance while keeping cost guidance in check is the real news here.

  • $0.71 actual (ex. items) vs $0.65e. CFPS of $2.09 is impressive and above estimates.
  • Revenues of $2.1 billion smoked the consensus revenue estimate of $1.6 billion.
  • Production grew 19% YoY and 9% sequentially to 1.868 bcfe per day, which was well above the top end of guidance of 1.736 to 1.780 bcfe per day.
  • They are now the third largest producer of natural gas in the U.S., up from 6th just last quarter. They surpassed Devon and Chevron in a single quarter. In Devon’s defense, they opted to produce more NGL’s during the quarter, otherwise it would have been closer to a tie.
  • 2007 YoY production guidance raised from 14-18% to 18-22%. Part of this is the West Texas deal with Anadarko Petroleum Corp. (NYSE:APC) announced last month, but the majority is drill bit performance.
  • 2008 production guidance also raised from 10-14% growth to 14-18% (and not that this is growth over a bigger 2007 base).
  • Operating costs came in at or below guidance on a per mcfe basis, and cost guidance sees no creep through year end.
  • Reserves reach 10.0 tcfe as of June 30, 2007, with 416% all in reserve replacement in the first half. Backing out acquisitions yields organic reserves replacement of 352%.
  • Cheap, cheap, cheap. With the stock trading at $35 and a fully diluted share count of 515 million shares, you’re talking about an $18 billion company. To be exceedingly simple minded, just annualizing the quarter’s operating cash yields $4.3 billion, meaning the stock is trading at less than 4.2x current run cash flow.
  • They’re also selling some Appalachian assets for $600+ million. Maximize value and sell to accelerate that drilling program everywhere else. Nice.
  • Fortis has got to be feeling great about the downgrade last week. Maybe this will be enough to get Goldman Socks into gear and out of neutral… probably not.
  • Conference Call: 9 am ET.

Put the top line growth they’re talking about on those numbers and the valuation gets on the stupid side of cheap. And that’s before we even talk about asset value.

CHK 03 08 2007