This summary is based on the second quarter fiscal 2007 earnings call conducted by Chesapeake Energy Corp. (CHK) on August 3, 2007.
IR: Jeff Mobley
CEO: Aubrey McClendon
CFO: Marc Rowland
COO: Steve Dixon
Key Investors Issues
- EPS were $1.01 a share compared to 82 cents a share.
- Net income rose to $518.1 million from $359.9 million in the year-earlier period.
- Revenue rose 33% to $2.1 billion.
Second Quarter Highlights
The company overtook two large independents and one major company to become the largest independent producer of U.S. natural gas and the third largest U.S. gas producer overall.
Chesapeake''s production increased by 161 million cubic feet of gas equivalent per day on a sequential basis, and that''s a 9% increase in just one quarter. Production increased by 300 million per day on a year-over-year basis, that''s a 19% increase. All of these production increases came through the drill bit.
Proved and unproved reserves have been rapidly growing as well.
- At beginning of the year the company started with 9 Tcfe of proved reserve.
- Risk unproved reserves continue to expand alongside proved reserves as creage and seismic inventories continue to grow.
- The company recognizes more than 80 Tcfe of unrisked, unproved reserves on acreage and almost 21 Tcfe of risked unproved reserves. The relationship of 2:1 between risked and unproved reserves and proved reserves that has developed over the past few years is likely to continue in the future, giving further visibility and confidence into Chesapeake''s ability to maintain its high growth rate at attractive finding costs.
Growth is being generated from multiple geographical areas and from multiple play concepts.
For example, of the 300 million per day of year-over-year production increase, approximately one-third came from the Barnett Shale, 13% came from Southern Oklahoma, 10% came from Deep Haley, and that does not include the recent 40 million per day of production picked up from Anadarko. 10% came from Sahara, and the final one-third came from other plays.
The company entered the Barnett in November 2004 and one year later it is running four operated rigs. Two years later, in the fall of 2006, the company was running around 20 rigs and today it is running 35 operating rigs and will further increase that to 38 rigs in the next few months. The company continues to enjoy attractive drill bit finding costs from Barnett acreage of around $1.50 to $1.60 per Mfce. Average acreage, brokerage, and seismic costs average around $10,000 per net acre, yet that only add about 35 cents per Mcfe to finding cost.
The purpose of large scale Barnett drilling ramp-up is to make this enormous upside more visible and tangible by turning non-producing leasehold into cash flowing producing PDP assets.
Three years ago the company had no production in the Barnett, two years ago it averaged 35 million a day during the second quarter, and one year ago this past quarter, the company averaged 110 million per day.
In the fourth quarter of 2006, the company averaged 157 million a day from the Barnett. In the first quarter of 2007, the company averaged 180 million a day, and in the second quarter it averaged 207 million per day. Currently, the company is producing about 230 million per day net from the Barnett.
Chesapeake''s Barnett assets are focused in the best geological part of the play, the core and tier 1 area of Northern Johnson County, Western Dallas County, and all of Tarrant County. In this area, Chesapeake has amassed over 180,000 net acres and the company is adding to that total by approximately 10,000 net acres per quarter. At that rate of leasehold acquisition, the company should be able to maintain a rolling backlog of some 2,500 undrilled wells for years to come.
The company has decided not form a CHK dropdown MLP, as it sees potential tax and governance issues associated with such vehicles.
So instead of forming own MLP, the company has decided to sell into the MLP market a production stream of 30 million cubic feet of gas per day in the form of a non-operated, approximate 35% undivided working interest in approximately 4,300 Chesapeake operated wells in Appalachia.
Drill bit finding costs move downed to $2.14 per Mcfe versus reported $2.66 in the first quarter.
- The company has continued to see flat to down service costs over the last few months, with some areas, such as the Barnett Shale, reflecting lower stimulation cost as more equipment and new service providers enter into that market.
- Chesapeake has seen an 8% reduction in intangible drilling costs in the first half of 2007.
- In the Barnett alone, drill bit costs were $1.62.
