Do Surging Natural Gas Prices Solve Chesapeake Energy Corporation's Problems?

Recent results suggest higher prices for natural gas solve a lot of the problems suffered by Chesapeake Energy in the last several years.

Jun 4, 2014 at 3:49PM

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.

Bottom line
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.

Do you know this energy tax "loophole"?
You already know record oil and natural production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Mark Holder has no position in any stocks mentioned. The Motley Fool recommends Range Resources. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers