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Chesapeake Continues To Thrive As Oil Prices Remain Volatile

Summary

Revenues swelled by 17% during the quarter. Earnings per share announced at $0.38 topped analyst’s expectations of $0.33 cents of earnings per share and revenues of $4.84 billion.

Chesapeake’s outlook for total adjusted production was a 9-12% growth. Daily equivalent rate in million barrels of oil equivalent is expected to range between 695-705.

Chesapeake’s debt amounted to $11.5 billion by quarter end. It announced the sale of assets to Southwestern Energy Corp for a sum of $5.38 billion in October.

Chesapeake has received a subpoena from the Department of after authorities received complaints against the company breaching antitrust laws.

Chesapeake is on the right track to report strong earnings in the upcoming quarter. Its past performance warrants for investment in the company’s stocks.

Second largest natural gas producer, Chesapeake Energy Corporation (NYSE:CHK) announced its third quarter earnings on November 5, 2014, and reported better results on the back of improved capital efficiency, cost controls and asset management. The company also managed to boost production during the quarter which further improved results. Chesapeake was also able to exercise control over the operating expenses during the quarter which subsequently improved bottom lines for the company and was a factor that boosted investor confidence. Shares spiked by 6.3% on the morning of the earnings announcement, lifting share prices to $22.64 in the Net York Stock Exchange morning trading.

Oil equivalent production during the quarter rose to 66.8 mmboe; up 7.7% annually and 5.7% sequentially. Production on average amounted to 725,600 barrels of oil equivalent per day during the quarter. Oil production for the quarter amounted to 10.9 mmbbls, which was 0.9% lower annually but rose by 5.8% from the production by Chesapeake in the previous quarter. Average realized price of oil per barrel declined drastically during the quarter to $84.81, recording a 7.9% decline over the third quarter in the previous year. NGL production amounted to 8.8 mmbbls; 62.9% higher annually and 14.3% higher sequentially. Natural gas production noted a 3.3% increase annually and amounted to 282 bcf in the third quarter.

For the three months ended September 30, 2014, Chesapeake's revenues swelled by 17.18% year on year to $5.703 billion. While oilfield services contributed nothing to revenues this quarter, core production contributed $2.341 billion to revenues (47.6% higher year on year) and marketing, gathering and compression revenues amounted to $3.362 billion (10.88% year over year).

Income from operations increased a massive 169.3% over the operating income reported in the corresponding period. Operating income spiked from $436 million during the last year to $1.174 billion. Operating expenses rose during the quarter for Chesapeake, however, the top line growth was enough to offset this increase in expenses to pull up operating income. Net income for Chesapeake was reported at $692 million, a drastic increase over the net income of $202 million reported in the third quarter a year ago. Income available to shareholders grew 8.33% year over year, amounting to $169 million. Earnings per share amounted to $0.26, compared to the $0.24 earnings that were reported in the third quarter last year. Adjusted net income amounted to $0.38 per share, with an adjusted EBITDA of $1.236 billion, coming in higher than Thomson Reuters' expectation of $0.33 cents of earnings per share and revenues of $4.84 billion.

As of November 5, 2014, Chesapeake's outlook for total adjusted production was a 9-12% growth. Daily equivalent rate in million barrels of oil equivalent is expected to range between 695-705. Cash flow is expected to increase, with an outlook of $5250-5450 million, as leverage is aimed to be reduced by 30% by the end of the year 2014.

Chesapeake's show of strength

In its boldest move yet, Chesapeake announced the sale of its oil and gas assets to Southwestern Energy Corp for a sum of $5.38 billion in October. According to analysts, the proceeds from the sale will be used to retire the company's debt that stood at $11.592 billion by the end of the recently concluded quarter. Debt has been a major concern for Chesapeake as it borrowed heavily to fund the drilling of its wells in the past. Chesapeake realized that debt had amounted to highly unmanageable levels before it began taking steps to control the situation and generate enough cash and proceeds to retire the debt as soon as possible.

Chesapeake subpoenaed by the DoJ

After several law suits were filed against Chesapeake for violation for antitrust laws pertaining to oil and gas rights in different states, Chesapeake has received subpoenas from the department of Justice and is required to provide a history of its royalty payments to mineral owners in different states. Chesapeake has confirmed the news in a regulatory filing with the SEC and claims to be responding to the DoJ's demands in a timely manner. No official comment has been made by the company's spokespersons with regard to this matter. Chesapeake could be looking at an increase in litigation expenses if charged with antitrust offenses in the future. Currently, the outcome of these subpoenas are hard to judge.

Outlook

The analysis of Chesapeake's outlook suggests that the company expects to report a strong cash flow position by the end of the year, despite the price volatility that continues to eat away profits of energy companies in the world. Chesapeake is banking on its growth in production to contribute to strong top line performance in the future, while offsetting the price volatility impact on revenue generation. Giving due credit where it is deserved, Chesapeake was able to deliver above expectations for the quarter, despite being hit by the price volatility that has been a cause of concern from the beginning of this year. That being said, the company has been able to report robust enough earnings this quarter, convincing investors to believe that this year is on the right track to announce a solid finish.

Trading between the 52 week range of $16.69-$29.92, Chesapeake Energy's stocks have displayed a volatile trend in its gains and losses in the capital market. Year to date, shares have lost nearly 10% of their value, with the largest drop being witnessed on October 14, 2014, when share prices dropped as low as $17.49 on the close of trading, after which then began their recovery. Currently shares trade near the $23 mark, as analysts expect prices to rise close to $28.35 over the next 12 months. Offering a dividend yield of 1.50%, shares trade at 29 times their earnings. Chesapeake is a company that's holds a lot of potential and continues to perform well in the face of the challenges that the energy sector is currently facing. If production continues to rise as expected, the volatile energy market's effects might be offset by that. All in all, investors can expect a strong result for the fourth quarter and the full year, giving shares a further boost. Now would be the right time to consider a long term investment in Chesapeake to reap rewards in the future.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.