Chesapeake 1Q08 – Strong Quarter – Pre Call Notes

(CHK) - May 1 Close of $50.93

In A Nutshell. Chesapeake reported much better than expected bottom line results, costs were in line with guidance and reserve metrics were as good as anyone could expect except maybe one or two odd duck analysts. They also announced a new VPP and the expected sale of the Woodford acreage. The operations update was thin and we'll get a lot more color on the conference call.

The 1Q08 Numbers: 

  • EPS of $1.09 (ex item) vs $0.93 expected
  • CFPS of $3.07 vs $2.43 expected
  • 1Q08 Production of 2.244 Bcfepd (still 92% gas), vs guidance of 2.2 Bcfepd; up 1% from 2.219 Bcfepd sequentially,
  • LOE (lease operating expense) of $0.98 / Mcfe vs guidance of $0.90 to $1.00; this was $0.88 in 4Q07. I highlight the LOE in red as it represents a pretty good uptick in operating costs and they are guiding full year to $0.95 to $1.05 per Mcfe now, up from $0.90 to $1.00 just a month ago. I expect some questions on the call about cost creep and I'd bet it's largely fuel prices in the field and/or electricity.

 Reserves Update:

  • 11.48 Tcfe, up 6% from year end 2007 reserves of 10.88 Tcfe
  • 1Q reserve replacement: 395%. This is the amount of reserves they find or acquire relative to the amount they produce.
  • All in F&D: $1.95 / Mcfe.  That's very respectable and an improvement from their recent performance.
  • They're guiding for reserve growth to 13 Tcfe by YE08 and 15 Tcfe YE09.

Capital Budget: actually down a bit from their projected range for 2008. This reduction is attributable to the expected sale of the Woodford Shale assets by 3Q.

  • Woodford Shale Up For Sale: 170,000 acres remained as of year end with 1.3 Tcfe of unrisked proved reserves under them by company estimates. They expect to reap over $1.5 billion from a sale here.
  • Another VPP Get's Floated: $623 for 94 Bcfe of reserves, a nice sale at $6.63/Mcfe.


Volumes Guidance:

  • 2Q08: 2.275 Bcfepd, up 1% sequentially,
  • 2008: 2.36 Bcfepd vs prior guidance of 2.34 Bcfepd. This equates to 21% annual growth.
  • 2009: 2.74 Bcfepd, equal to prior guidance, (16% growth).
  • 2010: 3.150 Bcfepd (15% growth) - this is their first official guidance here and likely to be conservative.

Hedge Position: Taking the risk out gas prices.

  • 2008: 71% of expected gas production @ an average price of $8.77/Mcf, in line with volumes hedged as their last update.
  • 2009: 40% of expected gas production ($9.13/ Mcf), up from 30% as of last quarter

Operations Update: The company only provided a handful of highlights.

Barnett Shale:

  • 1Q08 avg net production of 410,000 MMcfepd is up 125% vs 1Q07.
  • current production is 430,000 MMcfepd and they are targeting 650,000 for a 2008 exit rate.


Fayetteville Shale: Booming

  • net production averaged 114 MMcfepd in the quarter, up ~ 700% YoY
  • currently producing 130 and targeting a year end of 200 Mmcfepd (0.2 Bcfepd)
  • they're drilling longer laterals, (averaged 3,363 feet during the quarter) and average peak production increased more than commensurately to 2.41 MMcfepd, up from 1.75 Mmcfedp in 1Q07.
  • operating 14 rigs now and moving to 23 by year end


Haynesville Shale Play: Northwest, LA.  Leasing acreage and adding rigs. 

  • Acreage now at over 300,000 acres, up from 200,000 acres as of March 24.
  • 4 rigs in the play, moving to 12 by year end (this was last stated as 10 so we're getting a little more confident in the play.
  • 4th horizontal well placed on line in the play in the last month, rate not given but hope to get more color on the call.

Marcellus Shale: About To Get Busy

  • 3 operated rigs, this should go up soon
  • 1.2 mm acres, planning to add another 200,000 acres



Conference Call: Friday 11 EST. Click here to listen.

Conference call notes to be added after the call:




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