Chesapeake Shares Diving on Results, McClendon (CHK, XOM, EOG)

Natural gas producer Chesapeake Energy Corp. (NYSE: CHK) reported first quarter results after the markets closed yesterday. The company missed the headline numbers, but that’s not the company’s biggest problem. That would be CEO and soon-to-be former chairman Aubrey McClendon, who still stands a chance that he could be booted out as CEO (our story here).

Chesapeake posted adjusted EPS of $0.18 compared with a consensus estimate of $0.29. Revenue was up 50% year-over-year to $2.42 billion, but analysts expected revenue of $2.75 billion. The company is the second-largest producer of natural gas in the US, trailing Exxon Mobil Corp. (NYSE: XOM) and ahead of EOG Resources Inc. (NYSE: EOG).

The bright spot in Chesapeake’s results was the boost in oil and liquids production over last year. Crude oil and liquids now account for 19% of Chesapeake’s production and 52% of the company’s realized revenue. A year ago, crude oil and liquids accounted for 13% of production and 23% of realized revenue.

The company’s realized price for natural gas in the quarter was $2.35/thousand cubic feet, down from $5.31 a year ago. The realized price for crude and liquids was $67.92/barrel, up from $63.20 a year ago. Boosting the company’s liquids production saved it from an even worse quarter, and Chesapeake will have to continue to boost liquids production.

Like Exxon, Chesapeake will curtail capital spending for the remainder of the year. The company said it would “further reduce drilling activity in dry natural gas plays and reduce spending on new leasehold.” Chesapeake expects to meet its goal of reducing debt to $9.5 billion by the end of this year by increasing liquids production and selling off assets.

Like every oil and gas company, Chesapeake lives and dies on upstream production and prices. With natural gas prices up about 20% in the last few weeks, there may be some recovery coming as production cuts take hold. But if liquids prices continue to decline, natural gas prices are unlikely to rise far enough and fast enough to make up the difference.

In pre-market activity this morning Chesapeake’s shares are down -8.4% at $17.95, in a 52-week range of $16.78-$35.75.

Paul Ausick