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Win-Win: Chevron Benefits from Oil Prices, Chesapeake Outsmarts Gas

Benefiting from a rise in oil prices and the ramp-up of facilities damaged by hurricanes last year, Chevron Corp. on Friday surpassed Wall Street estimates with a 40% jump in third-quarter profit compared with the same period a year ago. Leading independent Chesapeake Energy Corp., meanwhile, managed to outsmart the natural gas market by successfully hedging against falling prices, while also boosting its U.S.-based gas production.

Chevron, based in San Ramon, CA, reported net income of $5.0 billion ($2.29/share), compared with $3.6 billion ($1.64) in 3Q2005. Analysts had expected earnings to average around $2.03/share). The profits offset a decline in revenue, to $54.21 billion from $54.46 billion a year earlier. Chevron's worldwide production grew 6% to 2.7 million boe/d, about 152,000 boe/d higher than a year ago.

Perhaps taking a nod from ExxonMobil Corp., which tempered its record earnings with a statement that it was spending a lot of money to search for new energy (see Daily GPI, Oct. 27), Chevron CEO Dave O'Reilly stressed the company's "strong performance this year has allowed us to invest $11.5 billion in our excellent queue of projects, which are targeted to increase energy supplies. Our company's focus on operational excellence and capital investment discipline continues to be key to our success."

Chevron also acknowledged that quarterly profits were higher because a year ago, its refinery in Pascagoula, MS was shuttered because of hurricane damage Also in 3Q2005, only two months of Unocal's reserves in the Gulf of Mexico and the Caspian Sea were included in the earnings report.

Upstream earnings of $3.5 billion increased about $200 million from 3Q2005, with U.S. profits 5% higher at $1.3 billion. Partially offsetting earnings gains in the United States were lower prices for natural gas, higher operating expenses and an increase in depreciation expense for wells, equipment and facilities.

In the United States, Chevron's net production of 772,000 boe/d was up 5% from a year ago. Unocal and the restoration of volumes following last year's storms, offset normal field declines, Chevron said. The net liquids component of U.S. production increased 2% to 464,000 bbl/d, and gas production increased 10% to 1.8 Bcf/d. Chevron's 3Q2006 average U.S. natural gas sales prices fell 19% to $5.93/Mcf, while outside the United States, the average gas price of $3.66/Mcf was 17% higher than a year earlier.

Net income for Oklahoma City-based Chesapeake escalated to $522.6 million ($1.13/share), more than three times the $149.1 million (43 cents) in 3Q2005. Excluding a $150 million gain from its oil and gas hedges, the independent would have earned 83 cents/share, sharply higher than Wall Street's estimate of 72 cents. Revenue also climbed to $1.93 billion from $1.08 billion a year earlier.

Chesapeake's domestic-dominated gas production climbed to 133.8 Bcf from 108.8 in 3Q2005. Daily production averaged 1.597 Bcfe, an increase of 289 MMcfe/d, or 22% above the 1.308 Bcfe/d in 3Q2005. The producer also realized strong gas prices -- unlike most of its peers -- by increasing its hedges as prices declined, to $8.39/Mcf from $6.64 in 3Q2005. Proved reserves in the quarter set a record of 8.4 Tcfe, and Chesapeake delivered a year-to-date reserve replacement rate of 314% from 1.34 Tcfe of additions at a drilling and acquisition cost of $1.89/Mcfe.

Despite all of the good news, Chesapeake said in statement that its quarterly production "did not meet the company's expectations primarily because of delays in Fort Worth Barnett Shale well completions caused by a new drilling program that favors utilizing multi-well drilling pads over single well drilling locations. The company believes this new approach will lead to more efficient field development and may ultimately result in greater per well reserve recoveries. However, it also creates a large backlog of uncompleted wells (currently approximately 30 wells), as all drilling from a pad must be completed before completion and production operations may commence."

Chesapeake now expects gas production to range between 139-141 Bcf in the final quarter, and total 527-529 Bcf for 2006. In 2007, it is forecasting production will grow 14-18%.

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