This summary is based on the fourth quarter fiscal 2008 earnings call conducted by Chesapeake Energy Corp. (CHK) on February 18, 2009.
Management:
Chairman and CEO: Aubrey McClendon
EVP and CFO: Marc Rowland
EVP, Operations and COO: Steve Dixon
EVP, Exploration: J. Mark Lester
SVP of IR and Research: Jeff Mobley
Key Investor Issues:
- Q4 net loss was $866 million or $1.51 per share versus net income of $158 million or 33 cents in the last year quarter.
- Q4 revenue was $2.981 billion compared with $2.089 billion in the year ago period.
- Quarter-to-quarter production increased from 204 bcfe to 213 bcfe.
Fourth Quarter Highlights:
The company was required to take a non-cash after-tax impairment charge of almost $2 billion.
- However, the company was still profitable by more than $600 million for the year.
- Excluding impairments and other non-cash items, the company earned almost $2 billion in net income on record production of 843 Bcfe.
- The operating cash flow exceeded $5 billion and adjusted EBITDA exceeded $6 billion, both of which were company records.
During the year, the management sold undeveloped leaseholds that had a cost basis of only $1.1 billion for $5.3 billion in cash and $4.6 billion of future drilling carries.
- This resulted in $8.8 billion of profit in the process.
- The company retained a stake in the assets worth an indicated value of $26 billion.
From an operational perspective, the management discovered the Haynesville Shale.
- The company built the dominant leasehold position in this field.
- The management expects this to become the largest producing gas field in the U.S. by mid-decade.
The Barnett Shale production increased over the past year by 50% to 925 million per day gross operated and 610 million per day net.
- In addition, the Fayetteville Shale production increased over the past year by 80% to 285 million per day gross operated and 180 million per day net.
- The production figures are after the disposal of 25% of assets in the play to BP in Q3.
- Through the three JVs, the management also created a $4 billion receivable that is not on the books but will be highly beneficial in the next few years.
- The management believes it created more value in 2008 than in the entire five-year period from 2003 to 2007 when the stock price increased by 400%.
- However, the stock price in 2008 declined by 60% amid the global financial crisis.
The management remains focused on four competitive advantages that will enhance the company’s position in years to come.
- The
asset quality of the company remains superior.
- While the last quarter of 2008 may have been all about balance sheet strength, going forward it''s going to be about asset quality strength.
- The foundation of asset strength in the U.S. in 2009 and beyond will be determined by how skillfully companies have positioned themselves into the four best plays in the U.S being the Haynesville, Marcellus, Barnett and Fayetteville Shale.
- Chesapeake is the only company with a top two position in the four big shale plays.
- Chesapeake has a unique and irreplaceable asset base in these Big 4 shale plays and this asset base will drive relative outperformance for years to come.
- The company''s second major competitive advantage is the
$4 billion of drilling carries.
- These were created by the three joint ventures with Plains, BP and Statoil.
- They will be earned by the company tax free and will be received over the next four years with approximately $1.2 billion coming in 2009 and about $1 billion in 2010.
- As drilling costs fall significantly in 2009, these carries will be worth even more as they will enable the company to develop more reserves than previously modeled in a higher-cost world.
- The company’s third major competitive advantage is its
hedge position.
- Currently, the management has hedged almost 80% of projected 2009 production at an average NYMEX price of approximately $7.71 per Mcfe.
- As of last Friday, the comany had a positive marked-to-market gain of $1.6 billion on open positions
- Few companies are as well hedged as Chesapeake.
- Chesapeake''s fourth major competitive advantage results from a combination of the first three, being
the ability to replace its produced reserves with only 15% of its projected cash flow in 2009 and only 20% in 2010.
- Other companies in the industry report that they will have maintenance CapEx requirements greater than 100% of their projected cash flow in 2009.
The management is seeing opportunities from the current very low natural gas prices.
- By year end 2009, gas production should be in full retreat in the U.S., setting the stage for a strong rebound in gas prices in 2010 and 2011.
- Despite the worst case economic scenario, gas demand cannot fall faster than the 25% to 30% rate that supply can deplete.
- This fundamental law of depletion will restore gas prices to equilibrium more quickly than most observers believe possible.
The depreciation, depletion and amortization rate for the fourth quarter was down to only $2.12 per Mcf equivalent.
- This is down from a high of $2.60 per Mcfe in the second quarter of 2007.
- The last time it was this low was the fourth quarter of 2005.
- The company has guided a full year rate of between $1.90 and $2.00 for 2009.
- At the midpoint of the guidance, this would represent a 17% reduction from the 2008 rate of $2.34 per Mcf equivalent.
The widespread recent field differentials to NYMEX have reportedly blown out in most basins.
