Chesapeake's Q3'09 earnings slide in 'difficult' natural gas price environment

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Related Documents Earnings Release (ER) Chesapeake Energy Corporation 9/30/2009, filed on 11/2/2009 Press Release (PR) Chesapeake Energy Corporation 10/29/2009, filed on 10/29/2009

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Chesapeake Energy Corp. on Nov. 2 reported third-quarter 2009 net income to common shareholders of $186 million, or 30 cents per common share, compared to $3.29 billion, or $5.62 per common share, in the third quarter of 2008.

During a third-quarter earnings conference call Nov. 3, Chesapeake Executive Vice President and CFO Marcus Rowland emphasized the company has continued to be profitable even "in this very difficult gas price environment."

Despite the low gas commodity price environment, Chesapeake's daily production hit a new quarterly record of 2.483 Bcfe during the third quarter. "In October our net production has already been as high as 2.6 Bcfe, so we are on track to continue capturing gas production market share in the months and years ahead," Chesapeake Chairman and CEO Aubrey McClendon said during the call.

By year-end 2010, Chesapeake said it expects its daily net production to exceed 2.8 Bcfe, and by year-end 2011 it expects its net production to exceed 3.1 Bcfe. "These production increases continue to be led by growth from our big four shales and Granite Wash plays," McClendon said.

The company said its daily production for the third quarter represented an increase of 30 MMcf of natural gas equivalent, or 1%, over the 2.453 Bcfe produced per day in the second quarter, and an increase of 162 MMcfe, or 7%, over the 2.321 Bcfe produced per day in the third quarter of 2008.

Chesapeake's average daily production for the third quarter consisted of 2.286 Bcf of natural gas and 32,902 barrels of oil and natural gas liquids. The company said it anticipates delivering full-year production growth of approximately 5% to 6% in 2009, 8% to 10% in 2010 and 12% to 14% in 2011.

During the conference call, McClendon touted the work of America's Natural Gas Alliance, a new Washington, D.C.-based association whose members include Chesapeake and other top independent natural gas producers in the United States and Canada. In recent months, the group has ramped up efforts to boost the image of natural gas as an abundant North American energy resource.

"I think we are engaged across the board in a way that we never had before," McClendon said. "We are communicating in ways that we never had before. … And when you realize that there is natural gas abundance then you can begin to think about environmental and energy and national security issues differently."

As gas companies and trade groups lobby in Washington and across the country, McClendon said the industry should not necessarily view the coal industry as a problem. The "credibility factor of that industry is pretty low," he said.

It will take time to get people to view natural gas as an abundant resource, McClendon said. "Remember, this is an industry where we haven't been able to say our product is in abundance over most of the past 20 years, and today we now say that and it takes a lot of people time to catch up to where we are from where we were four years ago," he said.

Some traditional users of natural gas have not been helpful in promoting the gas industry, McClendon said. "They do not want to see new markets for natural gas develop, and we have our work cut out to convince those folks that there is plenty of natural gas for them and there's plenty of natural gas to begin [to] convert our transportation system away from oil to natural gas in a way to reduce our reliance on coal and the power sector. So all those things take time."

Chesapeake reports decline in estimated proved reserves

The average prices that Chesapeake realized during the third quarter, including realized gains or losses from natural gas and oil derivatives, but excluding unrealized gains or losses on such derivatives, were $6.04/Mcf and $66.42/barrel, for a realized natural gas equivalent price of $6.44/Mcf, the company said. Realized gains from natural gas and oil hedging activities during the third quarter generated a $3.20 gain per Mcf and a $3.95 gain per barrel, for a 2009 third-quarter realized hedging gain of $687 million, or $3.00/Mcfe.

Without realized hedging gains, the company's average realized prices for the third quarter would have been $2.84/Mcf and $62.47/bbl, for a natural gas equivalent price of $3.44/Mcfe. Excluding hedging activity, Chesapeake's average realized pricing basis differentials to NYMEX during the 2009 third quarter were a negative 55 cents per Mcf and a negative $5.83/barrel.

By comparison, the company's average prices realized during the 2008 third quarter, including realized gains or losses from natural gas and oil derivatives, but excluding unrealized gains or losses on such derivatives, were $8.02/Mcf and $75.74/barrel, for a realized natural gas equivalent price of $8.38/Mcfe.

Chesapeake began the third quarter with estimated proved reserves of 12.525 Tcf of natural gas equivalent and ended the quarter with 11.994 Tcfe, a decrease of 4%. The quarter's reserve movement included 228 Bcfe of production, 664 Bcfe of extensions, 325 Bcfe of positive performance revisions, 1.191 Tcfe of negative revisions resulting from natural gas price decreases between June 30 and Sept. 30, and 101 Bcfe of net divestitures.

Based on current strip natural gas pricing, the company expects to recover at year-end 2009 approximately half of the 2.164 Tcfe of its proved reserves that have been revised downward during the first three quarters of 2009 as a result of the decline in natural gas prices and to recover by year-end 2010 all or substantially all of those price-related revisions.