Chesapeake Energy Corporation (NYSE:CHK) might be America's second largest natural gas producer, but it was the company's oil production that was the story in the fourth quarter. A weak oil market, which saw the price of crude drop 50%, ate into Chesapeake's earnings, causing the company to miss Wall Street's estimates as its earnings fell nearly 60%. That oil market's failure to improve is forcing the company to adjust its growth plans in 2015.
Drilling down into the numbers
Chesapeake Energy reported fourth-quarter earnings of $586 million, or $0.81 per share. However, $552 million of that amount was due to an increase in unrealized gains on the company's oil and gas hedges, which are typically adjusted by analysts. As a result of this adjustment the company's actual net income was just $34 million, or $0.11 per share. Not only was that 60% below the $0.27 per share the company earned in the fourth quarter of 2013, but it was also $0.13 less than analysts were expecting.
The culprit, of course, was weak oil prices, which also led to weaker NGL prices for Chesapeake. The company's oil hedges helped to minimize some of the damage here, as Chesapeake was able to realize $76.40 per barrel of oil, which wasn't that far below the $89.58 per barrel it realized in the fourth quarter of last year. However, what really hurt the company was lower NGL prices, which are tied to the price of oil. Chesapeake only realized $13.11 per barrel of NGL, which was 58% less than the $31.76 it realized in the fourth-quarter of last year. That stung twice as hard, as its NGL production adjusted for asset sales is up 40% over the past year and is now 13% of total production.
Speaking of production, Chesapeake Energy did have a solid quarter operationally as its production was up 12% year-over-year to 729,000 barrels of oil equivalent per day. A bulk of that production is still natural gas, which is 70% of total production and was up 9% over the prior year. Meanwhile, oil production was up 7%, while NGL production of course surged 40% over the prior year's fourth quarter.
A look ahead
Given the weak commodity price market, Chesapeake Energy is pulling back on its spending and growth in 2015. The company plans to spend $4 billion-$4.5 billion this year, which is about 37% lower than it spent last year. That will result in adjusted production growth of just 3%-5% next year.
More than half of the company's capital will be spent on just two plays. The Eagle Ford will see 35% of spending, which is actually a drop from the 40% the company spent there in 2014. Meanwhile, the Utica shale will see a quarter of the company's 2015 capital, which is a big boost from the 10% Chesapeake spent in the play last year. The rest of the company's budget will be spread around its other five plays.
What is notable about the shift in spending is that the company will see a shift in its production mix next year. NGLs will only make up 10% of 2015 production as Chesapeake focuses its growth on natural gas, as it's expected to be 73% of production this year.
Like most of its peers Chesapeake Energy saw its profits plummet due to the weak oil market. As a result, the company is cutting spending and will see its oil-related production decline next year as it shifts its focus back toward natural gas. It's the prudent thing to do, as there's no reason to grow oil and NGL production given how oversupplied the market is right now.