Chesapeake's Not Holding Back

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.

Start investing today -- just $7 per trade with Scottrade. Or find the broker that's right for you.

Cimarex and Chesapeake are Inside Value recommendations. Rip into any of our Foolish newsletters free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool owns shares of Chesapeake and XTO, and has a disclosure policy worth drilling into.


Read/Post Comments (0) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 957957, ~/Articles/ArticleHandler.aspx, 10/24/2014 11:18:55 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement