Chesapeake Energy Corp. has reached its debt reduction goal, built an internal oilfield services unit to counter cost inflation and grew first quarter production 20% as it increasingly emphasized higher-value oil and natural gas liquids (NGL), CEO Aubrey McClendon enthused during an earnings conference call Tuesday. But Wall Street was not impressed.
The company's shares closed down nearly 6% Tuesday at $31.33 following more modest pre-market declines that moved McClendon to complain to financial analysts that "no good deed goes unpunished."
McClendon touted $30 billion of potential value creation during the first quarter from $23 billion in liquids-rich acreage and another $7 billion for the company's oilfield services assets.
"...I'm glad that we didn't highlight, say, $60 billion of possible value creation this quarter; our stock might be down even more," McClendon lamented. He also blasted credit ratings agencies for not appreciating the company's asset monetizations through volumetric production payments (VPP).
Equity investors were likely looking at rising drilling and completion costs, now projected to be $5.5-6 billion, up from $5-5.4 billion, and unrealized hedging losses that dinged first quarter results.
Chesapeake reported a net loss of $205 million (minus 32 cents/share), thanks largely to an unrealized after-tax loss of $725 million from gas, oil and interest rate hedges. Excluding special items, earnings were $518 million (75 cents/share), which beat Wall Street expectations.
First quarter production averaged 3.107 Bcfe/d, an increase of 521 MMcfe/d, or 20%, over the 2.586 Bcfe/d in the year-ago quarter and an increase of 187 MMcfe/d, or 6%, over the 2.920 Bcfe/d produced in the fourth quarter of 2010. First quarter production consisted of 2.704 Bcf of natural gas and 67,200 bbl of oil and NGLs. Total production of 279.6 Bcfe consisted of 243.3 Bcf of natural gas (87% on a natural gas-equivalent basis) and 6 million bbl of oil and NGLs (13% on a natural gas-equivalent basis).
Year-over-year growth of gas production was 16% and year-over-year growth of liquids production was 56%.
Realized prices during the first quarter -- including realized hedging gains/losses but excluding unrealized gains/losses -- were $5.31/Mcf and $63.20/bbl, yielding a gas-equivalent price of $5.99/Mcfe. Realized gains from gas hedging generated a gain of $2.07/Mcf, while realized losses from oil hedging generated a loss of $2.88/bbl. Overall, first quarter net realized hedging gains were $488 million, or $1.74/Mcfe.
Chesapeake said it "has substantial value in its undeveloped leasehold, particularly its unconventional natural gas shale plays in the Marcellus, Haynesville, Bossier, Pearsall and Barnett and its unconventional liquids-rich plays in the Granite Wash, Cleveland, Tonkawa and Mississippian plays of the Anadarko Basin; the Eagle Ford Shale in South Texas; the Niobrara Shale in the Powder River and DJ [Denver-Julesburg] basins; the Bone Spring, Avalon, Wolfcamp and Wolfberry plays of the Permian Basin; the Three Forks/Bakken play in the Williston Basin; and the Utica Shale in the Appalachian Basin."
On Monday when it announced earnings Chesapeake also said it has agreed to monetize certain producing assets in the Midcontinent through a 10-year VPP with an affiliate of Barclays PLC for about $850 million. The transaction includes about 180 Bcfe of proved reserves and about 80 MMcfe/d of current net production.
Chesapeake said it retained drilling rights on the properties below currently producing intervals and outside existing producing wellbores and the production "tail" beyond 10 years. The transaction is Chesapeake's ninth VPP and is expected to close in the second quarter. Inclusive of this pending VPP sale and the company's eight previously closed VPPs, the company will have sold 1.215 Tcfe of proved reserves for total proceeds of $5.619 billion, for an average sales price of $4.62/Mcfe, it said.
During the earnings conference call, executives were asked whether they would consider royalty trusts.
"That is something that we have talked about and will consider," said CFO Domenic Dell'Osso Jr. "We don't yet have a real clear picture of how the [credit] ratings agencies will look at them...They don't all look at VPPs the same. The hope that we have is that we can continue to make the case that these royalty interest sales are similar to a royalty trust...The royalty trusts that have been done are very effective monetization tools and something that we would consider."
McClendon said Chesapeake's debt would likely trade at investment grade before it actually achieves that designation from the ratings agencies.
"The more important thing to me than the [credit] rating is how the market sees where the company is today than credit statistics," he said. "I don't think we'll ever see eye-to-eye with the ratings agencies on VPPs. They're quite simply just wrong in their approach to that, but that doesn't mean that [VPPs] are anything other than tremendous economic and financial monetizations on our part."
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