Chesapeake Energy Corporation Continues to Outperform

Chesapeake Energy's first quarter earnings show why the market loves the natural gas producer.

May 12, 2014 at 4:13PM

Many investors believe that the market is a better predictor of the future than any market pundit. This is because the market reflects the collective intelligence of thousands of investors, rather than the opinion of one. 

Because the market is a good predictor of the future, given the remarkable strength of shares of Chesapeake Energy (NYSE:CHK) recently, it should come as no surprise that the company reported excellent first quarter earnings. 

First quarter earnings show strong growth 
For the quarter, Chesapeake Energy reported revenues of $5.04 billion, which increased 47% year over year, and adjusted earnings of $0.59 a share, which increased 97% year over year. Both revenues and adjusted earnings beat analyst expectations. 

In addition to better top and bottom lines, Chesapeake Energy's adjusted EBITDA rose 34% year over year to $1.5 billion while the company's operating cash flow rose 37% year over year to $1.614 billion.

The company's adjusted EBITDA and operating cash flow increased mainly due to higher realized prices and lower costs.  

The company's realized natural gas price, for example, increased from $2.13 per thousand cubic feet to $3.27 per thousand cubic feet. Its average production expense, meanwhile, fell 8% year over year to $4.73 per barrel of oil equivalent. Adjusted G&A expenses also fell 27% year over year to $1.09 per barrel of oil equivalent.

On the whole, the company averaged production of 675,200 barrels of oil equivalent a day, or a 11% increase year over year. The production increase is impressive given that total capital expenditures actually fell 50% year over year to $850 million. In short, Chesapeake Energy is doing more with less.

With natural gas prices rising and the American economy picking up steam, leading natural gas companies like Chesapeake Energy and EQT Corp (NYSE:EQT) have strong tailwinds behind them. Given that natural gas prices are so much higher outside the United States, domestic natural gas prices may continue to rise in the long run and take the share prices of leading natural gas producers with them. 

On a company level, Chesapeake Energy's earnings reflect a company with improving fundamentals. Chesapeake Energy's profits and revenues are rising as natural gas prices rise. Management is doing a good job at execution. The company's total production is growing at a double-digit percentage rate even though the company is spending less in capital expenditures. Perhaps more importantly, the company is growing its higher margin natural gas production at a very fast rate. Chesapeake Energy's first quarter natural gas liquid production rose 55% year over year, and the company's liquid mix is now 29% of total production versus 24% one year ago. By producing more higher-margin liquids, Chesapeake Energy is becoming less dependent on natural gas prices and more profitable. 

The bottom line
Chesapeake Energy's outlook for 2014 reflects more of the same positive trend. For the full year, management expects total production to grow by 9%-12% and natural gas liquids production to grow by 58%-63%.  The company also hopes to reduce capital expenditures from $6.7 billion in 2013 to $5.4 billion. If these trends continue, Chesapeake Energy should have significant cash flow to pay down debt or buy back shares by 2015.

With its stock making 52-week highs after earnings, the market certainly loves Chesapeake Energy. As long as natural gas prices don't head south, Chesapeake Energy should continue to outperform.

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Jay Yao has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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