This summary is based on the third quarter fiscal 2007 earnings call conducted by Chesapeake Energy Corp. (CHK) on November 7, 2007.
Chairman of the Board, Chief Executive Officer: Aubrey K. McClendon
Chief Financial Officer, Executive Vice President: Marcus C. Rowland
Senior Vice President, Investor Relations: Jeffrey L. Mobley
Key Investors Issues
- During the quarter, the earnings per share fell from 1.13 per share to 72 cents a share.
- Quarterly revenue increased from $1.93 billion in prior year to $2.03 billion.
- During Q3, the company produced 186.4 billion cubic feet of natural gas equivalent (bcfe).
Third Quarter Fiscal 2007 Financial Highlights
For the quarter, Chesapeake generated net income available to common shareholders of $346 million (72 cents per common share).
- The operating cash flow was $1.085 billion.
- The EBITDA was $1.240 billion on revenue of $2.027 billion.
- The production was 186.4 billion cubic feet of natural gas equivalent (bcfe).
The company’s 2007 third-quarter net income available to common shareholders and EBITDA include an unrealized after-tax mark-to-market gain of $16 million resulting from the company’s oil and natural gas and interest rate hedging programs. Excluding this item, Chesapeake generated adjusted net income to common shareholders in the 2007 third quarter of $330 million (69 cents per fully diluted common share) and adjusted EBITDA of $1.195 billion. The excluded item does not affect the calculation of operating cash flow.
The average daily production of oil and natural gas increased 8% and 27% over production in the 2007 Q2 and the 2006 Q3, reflecting the 25th consecutive quarter of growth.
Daily production for the 2007 third quarter averaged 2.026 bcfe, an increase of 158 million cubic feet of natural gas equivalent (mmcfe), or 8%, over the 1.868 bcfe of daily production in the 2007 second quarter and an increase of 429 mmcfe, or 27%, over the 1.597 bcfe produced per day in the 2006 third quarter. Virtually all of the company’s production growth on both a sequential and year-over-year basis was through the drillbit. Chesapeake’s average daily production for the quarter consisted of 1.851 bcf of natural gas and 29,130 barrels (bbls) of oil.
Chesapeake’s 2007 third-quarter production of 186.4 bcfe was an increase of 16.4 bcfe over the 170 bcfe of production in the 2007 second quarter and an increase of 39.5 bcfe over the 146.9 bcfe produced in the 2006 third quarter.
The company’s production for the quarter was comprised of 170.3 billion cubic feet of natural gas (bcf) (91% on a natural gas equivalent basis) and 2.680 million barrels of oil and natural gas liquids (mmbbls) (9% on a natural gas equivalent basis). The company’s sequential and year-over-year growth rates for its natural gas production were 9% and 27%, respectively, while the company’s sequential and year-over-year growth rates for its oil production were 15% and 23%, respectively. Chesapeake’s production growth rates were achieved despite the curtailment of approximately 3 bcfe of the company’s net production during September 2007.
The 2007 third quarter was Chesapeake’s 25th consecutive quarter of sequential U.S. production growth. Over these 25 quarters, Chesapeake’s U.S. production has increased 417%, for an average compound quarterly growth rate of 7% and an average compound annual growth rate of 30%.
As a result of better than expected results from the company’s drilling program, Chesapeake is raising its previous forecasts for total production growth for 2007 to 21% to 23% from 18% to 22% and for 2008 to 18% to 22% from 14-18%, while reaffirming its 12% to 16% production growth forecast for 2009.
Oil and natural gas proved reserves reached record level of 10.6 tcfe during the quarter.
Chesapeake began 2007 with estimated proved reserves of 8.956 trillion cubic feet of natural gas equivalent (tcfe) and ended the third quarter with 10.562 tcfe, an increase of 1.606 tcfe, or 18%. During the first three quarters of 2007, Chesapeake replaced its 510 bcfe of production with an estimated 2.116 tcfe of new proved reserves for a reserve replacement rate of 415%. Reserve replacement through the drillbit was 1.761 tcfe, or 345% of production (including 859 bcfe of positive performance revisions and 79 bcfe of positive revisions resulting from oil and natural gas price increases between December 31, 2006 and September 30, 2007) and 83% of the total increase. Reserve replacement through the acquisition of proved reserves completed during the first three quarters of 2007 was 355 bcfe, or 70% of production and 17% of the total increase.
On a per thousand cubic feet of natural gas equivalent (mcfe) basis, the company’s total drilling and acquisition costs for the first three quarters of 2007 were $2.10 per mcfe.
This is excluding costs of $245 million for seismic, $923 million for acquisition of unproved properties, $780 million to acquire new leasehold, $182 million for capitalized interest on leasehold and unproved property and $144 million relating to tax basis step-up and asset retirement obligations, as well as positive revisions of proved reserves from higher oil and natural gas prices. Excluding these same items, Chesapeake’s exploration and development costs through the drillbit were $2.17 per mcfe during the first three quarters of 2007 while reserve replacement costs through acquisitions of proved reserves were $1.75 per mcfe. Total costs incurred in oil and natural gas acquisition, exploration and development activities during the first three quarters of 2007 were $6.5 billion.
During the first three quarters of 2007, Chesapeake drilled 1,523 gross (1,307 net) operated wells and participated in another 1,262 gross (173 net) wells operated by other companies.
The company’s drilling success rate was 99% for company-operated wells and 97% for non-operated wells. Also during the first three quarters of 2007, Chesapeake invested $3.1 billion in operated wells (using an average of 153 operated rigs) and $547 million in non-operated wells, using an average of 108 non-operated rigs.
