Based on first-quarter earnings, the surge in natural gas prices cured a lot of the ailments hurting Chesapeake Energy (NYSE: CHK ) over the last couple of years. According to the company, it remains the second-largest producer of natural gas and now the tenth largest producer of oil and natural gas liquids. So while the shift to liquids continues to gather steam, the company remains solidly reliant on the price of natural gas to achieve outsized returns for shareholders.
With the large valuations obtained by smaller natural gas focused producers Range Resources (NYSE: RRC ) and Antero Resources (NYSE: AR ) , it is clear that shifting away from natural gas isn't a requirement for success.
Natural gas production
For the quarter, natural gas production gained 4% year over year to reach 2.9 Bcf. Production gains were outpaced by adjusted oil production increasing 20% over the prior year period. Though Chesapeake Energy has spent considerably less on drilling dry gas wells, the company is focused on expanding production in the Utica Shale where wells are producing on average 60% natural gas.
In the Utica Shale, the company increased net production by 59% sequentially and had approximately 211 wells awaiting pipeline connections or completion. The amount is a large portion of the 485 gross wells drilled in the region.
Chesapeake continues its return to the once prolific Haynesville Shale where production declined an incredible 41% year over year. In total, the company produced 495 Mmcfe/d in the shale, generating a solid 8% sequential increase.
Those numbers speak to a couple of interesting trends in shale gas. First, the substantial production decrease further highlights end of life declines for horizontal shale wells. Second, the Haynesville shale in Northwest La. provides producers an attractive area to deliver surging gas demand along the Gulf Coast to fulfill chemical and export uses.
On the back of surging natural gas production in the Marcellus Shale and Utica Shale, Antero Resources increased daily production to 786 Mmcfe/d, a 105% increase over last year. The company's $15 billion valuation is close to matching that of Chesapeake Energ, despite the larger firm having natural gas production of 2.9 Bcf/d, or nearly four times that of Antero Resources -- another prime example that a focused producer obtains higher valuations.
Natural gas price realizations
A big issue with Chesapeake is that its natural gas comes mostly from infrastructure-challenged shale plays unable to obtain market prices. For the fourth quarter of 2013, the company sold natural gas at an incredible $1.76 below the NYMEX Henry Hub benchmark prices. This number is commonly referred to as the price differential.
This substantial price differential (along with low prices) left the large producer with a sales price of only $1.90 per Mcf to show for its efforts while the NYMEX Henry Hub averaged $3.66 for the quarter. The first quarter saw a dramatic improvement with the company realizing $3.27 per Mcf, leaving the differential at an improved level of $1.08 per Mcf lower than the market.
The realized prices are paltry compared to those of Marcellus-focused Range Resources, which saw $4.20 per Mcf after hedges during the first quarter. The number was an even more impressive $5.58 before the impact of hedges.
Even better, Antero Resources saw realized prices hit $5.02 per Mcf, actually down from the price realized in the first quarter of 2013. However, the average price before hedges was $5.05 per Mcf, up 38% over the prior year period. Last year's price of $3.67 per Mcf was actually higher than what Chesapeake Energy earned in the last quarter.
Surging natural gas prices solve a lot of the problems holding back Chesapeake Energy. The internal expectations for average commodity benchmark prices have already increased the forecasted yearly cash flow by $700 million. No quicker way exists to solve capital spending shortfalls and debt issues than obtaining more profit from existing business lines.
Both Range Resources and Antero Resources benefit not only by focusing on natural gas production, but also from the higher prices of the commodity. In fact, these details suggest Chesapeake might be better off focusing on better prices for the natural gas it produces than attempting a shift toward liquids.
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