Can Chesapeake Energy Corporation Reach Its 2014 Goals?

Chesapeake Energy's  (NYSE: CHK  )  first quarter earnings report showed a 47% spike in revenue and improved profitability. But the results also put into question the company's ability to reach its goals for the rest of the year. Let's review the main points from Chesapeake Energy's first quarter earning report and analyze the potential ramifications the results could have on its performance in the coming quarters.

Quarterly production didn't meet its guidance
During the first quarter of 2014, the company increased its production, mainly in oil and NGLs. Its total oil equivalent production was off by roughly 10% from its 2014 guidance, however, at only 60.8 million barrels of oil equivalent. The company's total production rose by only 1.8% compared to last year. Based on these figures, if the company doesn't increase its production in the second quarter, this could jeopardize its ability to reach its annual guidance.  

NGL production is about to rise
In the recent quarterly earnings report, the company revised its 2014 outlook and expects to increase its NGL production. Despite the elevated prices of NGL in the past quarter, if prices start to come down, this development could contract its profit margins.

During the first quarter of 2014, the price of natural gas was higher by 53% than last year's first quarter prices. This resulted in a 46% spike in natural gas sales despite the 5% decline in natural gas production. Moreover, NGL prices were also higher by 3.5% compared to last year. As I pointed out in a recent article, the price of natural gas is likely to come down in the following quarters, which could lower its sales. But will it dip below last year's prices?  

Improved profit margin -- will it last?  
Due to elevated natural gas and NGL prices, during the past quarter, the company's operating profit expanded  to 14.5%. Back in 2013, Chesapeake Energy's profitability was much lower at 6.3%. Chesapeake Energy's heavy reliance on natural gas and NGLs benefited the company. Nonetheless, the higher profitability didn't translate to a higher dividend payment.

Looking toward the second quarter results, even if the price of natural gas comes down in the coming weeks, it is likely to remain higher than in the second quarter of 2013. The current average price of natural gas is around $4.6, which is still 14% higher than the same quarter last year. Therefore, the company's profitability could drop, but it is likely to remain higher than in 2013.  

Rise in marketing, gathering and compression segment – is this a good thing?
The company's marketing, gathering, and compression business segment grew by more than 70%, year over year. Despite this staggering rise, this segment's profit margin contracted from 2% to 1.2%. Therefore, even if the company continues to expand this business segment, this isn't likely to improve its bottom line.

Takeaway
Chesapeake Energy didn't reach its production guidance due to lower than anticipated production. Moreover, the company's ongoing rise in its marketing and gathering operations is likely to cut into its profitability. Despite these negatives, the company was able to increase its sales and profitability in the past quarter. Looking forward, if Chesapeake Energy doesn't pick up its production quota, this could result in the company not being able to meet its annual goals.

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