CHK 4Q08 Pre Call Note

CHK Reports 4Q08 Results; No Change To Volume Guidance Other Than Oil Gas Mix in 2010.

• The 4Q Numbers:
  • Production: 2.316 Bcfepd, 92% natural gas. This was already announced with reserves and was above the high end of the range despite some shut ins. On the surface this is flat sequentially.
    
    • Adjusted for asset sales and VPPs this represents 2% sequential and 14% YoY growth
    • 4Q08 volumes also omit 65 MMcfepd in voluntary curtailments due to low prices
    • Current production is 2.355 Bcfepd
  • Revenues of $2.981 vs $2.575 B expected
    • hedges improved gas price realization
  • Operating Costs
    • LOE: $1.09 a bit better than expected
      
  • EPS of $0.73 (ex items) vs $0.74 expected
  • CFPS of $1.76 vs $1.69 expected
• Operations Update:  Shale bullets, press release is a little short on details.
  • Haynesville:
    • producing 0.1 Bcfepd gross now (70 MMcfepd net)
    • expect to exit '09 at 0.575 Bcfepd gross.
    • 26 rig program in 2009, that's up a rig from the last report
    • No well news in the release
    • Expects Tiger pipeline in service (1 Bcfgpd capacity for CHK) by mid 2011.
    • The Haynesville is probably economic at a gas price of $3.50 or above
    • Targetting $0.75 drill bit F&D costs here
  • Marcellus:
    • Current production of 10 MMcfepd
    • Plans to significantly increase activity here in 2009/2010
    • Sees 14 rig program for 2009 (75% carried by STO) - nothing new in that
    • Marcellus is economic above $2.60.
    • Targetting $0.30 per Mcfe drill bit F&D costs here
  • Barnett:
    • Net production of 0.57 Bcfepd (just under 25% of the quarter's production) was up 10% from 3Q
    • Current net 0.61 Bcfepd, second to (DVN)
    • Target exit for 2009 of 0.725 Bcfepd net
    • Sees 25 rig program for 2009
    • In discussions "with several large international energy companies about a possible Barnett Shale joint venture transaction"
  • Fayetteville:
    • 4Q production of 0.165 Bcfepd, second to (SWN)
    • Current production of 0.180 Bcfepd
    • Sees 20 rig program, nearly 100% carried by BP
    • Sees 2009 exit of 0.235 Bcfepd
• Reserves:
  • 2008: 12.1 Tcfe (pre-announced)
    • Drillbit only F&D of $2.04 per Mcfe (this should come down much further in 2009 when the impact of their carried interests becomes pronounced). They're targeting $1.25 per Mcfe.
  • 2009: targetting 13.5 to 14 Tcfe (this may be quite a bit higher given the new SEC rules)
    
  • 2010: targetting 15 to 16 Tcfe
• Guidance:
  • 2009:  4.8% volume growth with the year averaging 2.41 Bcfepd, unchanged from last guidance
  • 2010:  13.3% growth to 2.73 Bcfepd, a little gassier than the last estimate but same over all equivalent growth.
  • FCF expectation drops due to lower price assumptions, 
  • EBITDA seen at $4.3 B in 2009 vs Street current estimate of $4.7 B
• Hedges Update: relatively unchanged from the update at the end of January. Between $5 and $7 natural gas, a $1 change in gas prices has minimal impact on earnings (4 to 5 cents) in 2009. The less hedge 2010 profile is more open with a $1 change shifting EPS by more than $0.60.  
  •  2009:
    • Swaps: 42% of gas at $7.79. Swaps with knockouts amount to only a fraction of 2009 gas production
    • Collars: 40% of gas with $7.30 floors.
  • 2010:
    • Swaps: 35% of gas at $9.43. Knockouts here amount to a heftier 226 Bcf of 2010 expected gas production but this is not news.
    • Collars: 13% of expected gas volumes with floors $6.48
• Balance Sheet:
  • Net debt to total cap of 43% at year end. Ok, not great, a little high for most people's taste during the current troubles in the debt markets although their ability to bring $1.4 B in high yield debt deals in the last month has proven they have the reserves and the track record to swap debt during the worst of markets.
  • Average Senior debt interest rate: 6.1%.
  • Seeking rating agency metric of long term debt to proved reserves of less than $0.75 per Mcfe at worst by year end 2010.
  • Currently at $1.02/Mcfe (debt to reserves), with reserves at the upper end of guidance by 2010 and debt only slightly paid down they would achieve the $0.75/Mcfe debt to reserves target.
• Gas Macro Comment:
  
  • Market setting up for a strong rebound by YE09 as falling rig count yields production drop just as the economy is recovering (sound familiar?)
    
  • Points to first year U.S. gas well decline of 25%
    
  • "nearly half of U.S. gas production comes from wells drilled in the last 3 years"
    
  • "25% of production comes from wells drilled in the last year"
    
  • Sees a 50% decline in the gas rig count yielding a 4 Bcfgpd decline in production by 2010.
    

• Nutshell: "In Line" quarter but guidance will take numbers slightly lower (lower realized price thoughts, higher share count).  Expected free cash flow generation is lower than in previous reports due to lower expected price realizations and if you look at the numbers the company is running through their 2009 and 2010 models they are hugging the strip which is probably a bit conservative (CHK is modeling 2009 gas prices to average $5.80 and 2010 to average $7.00).  Stock probably takes a hit on the open and potentially for the rest of the day but with unchanged production guidance, expected operating cost improvements which aren't being modeled yet, and their reserve growth expectations for 2009.
• Conference Call: Wednesday, 9am EST