Wake Up Little Susie, Smell the Smelling Salts Watch: To the 8 out of a total of 26 analysts who cover CHK and have rated it a HOLD (which in Wall Street parlance really means "look elsewhere" or "sell but I'm gutless and scared of my bankers") what exactly do you get paid for? TV appearances? Ohhhh, they paid too much for their assets, their F&D is too high, yada yada, yada. Tell me why I care when they have a picture perfect plan to monetize the latent assets on their balance sheet, including producing, drilling, and midstream assets while putting up double digit growth and keeping costs well in check? On to the quarter...
- ...And Oh What A Quarter It Was! CHK Reported Big Top and Bottom Line Beats; Raised Production Guidance; Maintained Cost Guidance, But Perhaps More Importantly Continued Rapid Growth of Reserves...What's Not To Like!?!
- EPS: reported $0.69 (ex items) vs $0.60 expected. CFPS from operation of $2.45/sh (Street was $1.83)
- Revenue: $2.03 B once again beat the heck out of the Street's $1.65 B expected. And although nice hedges helped the beat came right down from higher expected volumes.
- Record 3Q Production of 2.026 Bcfepd exceeds top end of guidance (1.95-1.99 Bcfepd), grows 8% sequentially which is astounding given their size. They accomplished this despite the "uneconomic gas price shut ins" which left 3.0 Bcfe in the ground in September. They are well on their way to being the #1 gas producer in the U.S. next year and they remain the most active driller in the country.
- Forward Guidance Up (Again). For Their Size This Will Be Best In Class:
Using the mid point of their guidance shows CHK expects to stay between 91 and 93% gas weighted for at least the next two years. No straying into oil for these guys like some of their big cap E&P peers (think EOG).
- Reserves: up 6% sequentially 10.6 Tcfe vs 10.0 as of the 2Q. They are targetting 25% reserve growth to 11 Tcf by year end.
- YTD Reserve Replacement: 415% (1.606 Tcfe in new reserves vs 503 Bcfe first nine months production).
- Reserve Life: Going Up - see chart below.
- Hedges: strong: 2008 NG > 60% hedged well over $8. Oil > 70% hedged over $70.
- Operational Highlights: Once again too much to go through in this venue but I'll hit the very high points
- They now estimate the unproved reserves (not an SEC designation but worthy of your attention) at 23 Tcfe, up from 20.8 last quarter.
- Leasehold up to 12.5 mm acres (up from 12.2 last quarter).
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Barnett Shale producing net of 330 MMcfepd, that's up a whopping, staggering 100 MMcfe (43%) in the last 3 months.It accounted for 26% of totalco production during the quarter. They are completing and expect to continue to complete 1 well on average every 15 hours through at least the end of 2009. Results continue to improve as costs come down and EURs come up. Now running 38 rigs, up from 35 last quarter and if that sounds strange it's because they're slowing some completions, not drilling, and that slower completion rate may be done now that gas is well off the September lows.
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Core and Tier 1 EURs went from 2.45 Bcfe to 2.65 Bcfe (for an extra $100K) which yields a per well cost of just under $1 per Mcfe. This is where most of their acreage is.
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Delaware Basin: still testing the waters in this West Texas Barnett/Woodford play. Huge position amassed (800,000 net acres). Early economics are sub $2/Mcfe F&D on verticals and they alluded to horizontals. In two years this could be another significant play for them...at present they have next to nothing booked and production of 3 mmcfepd.
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Deep Bossier: Also one to watch...you'll see an occasional mention of these in (GST) press releases from time to time.
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Appalachia Gas Basin. Think lots of little gas wells, drilled for little dollars. They've got about a T on the books here and another 3 Tcf of highly risked probables. Their whopping 3.8 mm acres should give them room to drill another 8,000 plus wells here. Steady cash flow, no risk and not very sexy. But then there's the Marcellus Shale and some deeper targets and suddenly you have some good questions for the conference call.
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Fayetteville: we've talked about this play ad nausium --but they did mention increasing their EUR target to 2.0 Bcfe (from 1.6 last quarter). Their production grew from 35 mmcfepd to 60 mmcfepd over the last quarter. The Fayetteville is a less homogeneous play than the Barnett and as they drill pilots in different parts of the core I would expect them to quickly improve on these results.
Cheap, cheap, cheap. With the stock trading at $40 and change and a fully diluted share count of 517 million shares you’re talking about an $18.8 billion company. To be exceedingly simple minded, just annualizing the quarter’s operating cash yields $5 billion meaning the stock is trading at less than 3.7x current run cash flow. This of course makes a guy like me yell, "oh come on!!!"
Conference call at 9 EST. More on the site after the call...
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