Chesapeake Has Gas Coming Out of Its Ears

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As always, Chesapeake Energy (NYSE: CHK) has given us plenty to chew on this earnings season.

In the third quarter, the natural gas hulk turned in sequential production growth of 2%, after adjusting for curtailments, divestitures, and other transactions. That's a moderation from last quarter, when the E&P really wasn't holding back. Not all curtailments were voluntary, either. Pipeline repairs held back Fayetteville shale volumes.

Production in this Arkansas gas field was still up 13% sequentially, mind you. Growth just wasn't as heady as it was over in the Haynesville, where average production rocketed 67% higher sequentially, to 229 million cubic feet per day. Daily volumes are projected to double off of that level by the end of 2010.

In total, Chesapeake produced more than 228 billion cubic feet equivalent of natural gas during the quarter. Meanwhile, the firm tacked on nearly a trillion cubic feet in organic reserve additions, marking the best period for such growth in the company's history. Chesapeake and other shale players like Range Resources (NYSE: RRC) and Southwestern Energy (NYSE: SWN) certainly aren't having trouble finding gas these days.

Thanks to hedging, Chesapeake achieved some very classy cash flow margins this quarter. I've often held up Ultra Petroleum (NYSE: UPL) as the paragon of profitable production, but Chesapeake actually surpassed that outfit with a 76% margin this period. Fat hedges helped make this happen, taking the firm's realized gas price in the quarter from $2.84/mcf to $6.04/mcf.

During the conference call, management made plenty of interesting points. Here are five that stood out to me:

• It's not the time to hedge for 2010, and competitors are limiting value creation by doing so.
• Chesapeake's backlog of drilled but uncompleted wells is cleared, and it suspects the industry's is as well.
• The international shale joint venture with StatoilHydro (NYSE: STO) should find something "actionable" next year.
• The company is evaluating an oil play in the Rockies. Does this mean Chesapeake is poised to join EOG Resources (NYSE: EOG) and XTO Energy (NYSE: XTO) in the Bakken?
• The firm is looking to high-grade its Haynesville position by selling off some acreage, particularly in East Texas.

Just to make it an even half-dozen, I'll also note that Chesapeake is still talking to potential partners in a Barnett shale joint venture, and looking to close a deal sometime soon. Stay tuned.

Related Foolishness:

• Make sure you check out our recap of Chesapeake's recent investor day.
• With shale plays exploding, no wonder this land driller's pondering a pickup.
• Range Resources is looking magnificent in the Marcellus.