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In the past, Chesapeake Energy (NYSE: CHK ) has had a tendency of unveiling rather massive press releases on the evening prior to its quarterly conference calls. This quarter, the E&P released its results in two stages. The typically comprehensive operational update ran last week, and then the firm's financial results were published the evening before Tuesday's call.
This gave everyone, from Wall Street analysts to Foolish individual investors, some time to digest all the material. It's a much-appreciated adjustment to Chesapeake's reporting practice.
As for the numbers, Chesapeake broke with last quarter's precedent of holding production growth flat. Output rose to 223 billion cubic feet equivalent for the period, a nearly 5% sequential increase. It's a bit of an unexpected shift, with Chesapeake having recently taken such pains to point out the value-enhancing merits of production curtailment.
In the release, Chesapeake noted that it's not currently curtailing production. When asked on the call why the company turned the taps back on, management provided two reasons.
One, the company is finally seeing regional gas price disparities narrow. That means the company is receiving better pricing in places like Oklahoma, which has seen its gas priced at deep discounts to the Henry Hub natural-gas benchmark for years now. Chesapeake reported that these so-called "basis differentials" in the Mid-Continent are now the lowest since 2004. This is good news for folks like Cimarex Energy (NYSE: XEC ) and Newfield Exploration (NYSE: NFX ) as well.
Two, Chesapeake foresees a situation in the near future in which the country's natural gas storage is so stuffed that pipeline operators like Kinder Morgan (NYSE: KMP ) force curtailments on producers across the industry. Thus, Chesapeake sees no reason to "take it on the chin" for peers like Devon Energy (NYSE: DVN ) and XTO Energy (NYSE: XTO ) .
There's a third reason you can't expect Chesapeake to hold back to such an extreme. The company's drilling costs in key shale plays like the Haynesville and the Fayetteville are being carried 50% to 100% by joint venture partners like Plains Exploration & Production (NYSE: PXP ) and BP. This effectively turns double-digit rates of return into triple-digit returns (or better) on Chesapeake's invested capital. You can hardly expect Chesapeake to turn its nose up at such numbers.