Chesapeake Energy Corp. posted better-than-expected earnings growth and record output in 1Q2006, leading financial analysts to up their estimates on the Oklahoma City-based independent. Earnings jumped to $604 million ($1.44/share), nearly five times higher than the $119.5 million (36 cents) reported a year ago, while production — 91% weighted to natural gas — rose 31%.

Total revenue more than doubled to $1.94 billion from $783.5 billion in 1Q2005. Wall Street analysts had pegged revenue at $1.48 billion. Chesapeake also effectively hedged 80% of its output in 2006, well ahead of its original 71%. It also hedged 56% of its output in 2007 and 41% in 2008.

Morgan Stanley analyst Lloyd Byrne said in a research note that “as Chesapeake steps up drilling, upside to past guidance appears possible.”

“Given the level of natural gas inventories and the current futures market, adding incremental hedges makes sense to us,” said Byrne. “If the well documented end of summer natural gas volatility impacts out year pricing, we would not be surprised to see Chesapeake lift these positions.” Byrne raised fiscal 2006 earnings estimates to $3.22/share, up from $3.16, and raised 2007 estimates to $3.36 from $3.19.

Jefferies also raised its 2006 estimate on Chesapeake to $3.36/share from $2.83, and it maintained a “buy” rating at a $37/share target.

Chesapeake’s output hit a record in the quarter, with daily production averaging 1.519 Bcfe, an increase of 357 MMcfe/d, or 31%, from the 1.162 Bcfe/d reported in 1Q2005 and 7% higher than the 1.418 Bcfe/d reported in 4Q2005. Quarterly production was comprised of 124 Bcf of natural gas and 2.12 million bbl of oil and natural gas liquids.

About 42% of the new production was organic; 58% was generated from acquisitions. The company’s trailing 12-month organic production growth rate was calculated at 13%. Of the 101 MMcfe/d in sequential quarterly production, 22% was generated from organic drillbit growth and 78% was generated from acquisitions, with the company’s sequential quarterly organic production growth rate calculated at 1.7%. Chesapeake is estimating production growth of 24% in 2006 and organic growth rates of at least 10% in 2006 and 7-10% in 2007.

“This company has clearly built itself around the notion that higher natural gas prices are here to stay,” said Motley Fool analyst Stephen D. Simpson in a note to clients. “If it’s right, this company is built to generate a lot of cash flow in the years to come. Accordingly, I mostly consider it a leveraged play on natural gas; if gas prices remain high, Chesapeake will likely produce better returns than more conservative players like XTO Energy, Devon and Apache, just to name a few. By the same token, this company made some mistakes in the past, and the stock cratered in the late ’90’s.

“Though I don’t share some investors’ bullishness on natural gas, I still find Chesapeake very interesting, particularly for the long-term,” said Simpson. “Since it lacks the threats facing some of the drillers, investors who believe in long-term natural gas prices might want to take a closer look.”

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