Oppenheimer & Co. analysts Fadel Gheit and Robert Du Boff rate Chesapeake Energy Corporation (NYSE:CHK) as an Outperform as they provide a first look on the company’s 4Q13 earnings.

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Adj. 4Q13 earnings were $204M, or $0.27/sh, below $0.40 consensus and up 2% YoY on liquids growth, but down 38% sequentially due largely to weaker oil & gas prices on wider differentials. Production averaged 665 mboed, up 2% and down 1%, due largely to lower completion activity and weather. Chesapeake Energy Corporation (NYSE:CHK) previously provided guidance of 2-4% production growth (8-10% adjusted for divestitures) while narrowing the cash flow deficit to $100-$300M, before capitalized interest. Chesapeake plans to fund that gap with $1B in non-core asset sales, $209M closed YTD, and earlier this week announced plans to pursue strategic alternatives for Chesapeake Oilfield Services (COS).

Chesapeake’s 4Q13 earnings

Adjusted earnings were $204M, or $0.27/share, well below consensus of $0.40, up 2% YoY on higher liquids production and pricing, but down 38% sequentially on slightly lower production and weaker price realizations compared to 3Q13. Marketing and services margins were $9M and $52M, respectively, -61% and +37% sequentially.

Production

Sales volume averaged 665 mboed, up 2% YoY (10% ex asset sales) and down 1%. Volumes were 111 mbd oil, +14% and -7%, 64 mbd NGLs, +27% and +9%, and 2.94 bcf/d of gas, -3% and -1%. Production was impacted by lower completions, weather and Utica midstream issues.

Prices and profit

Realized prices (ex-hedges) were $94.46/b for oil, $31.76/b for NGLs, and $1.84/mcf for gas, for a $26.49/boe average, +3% YoY and -11% sequentially due to widening gas gathering/transport differentials. Unit costs averaged $19.35/boe, flat vs. both periods, and unit profit averaged $3.47/boe, down 3% and 38%.

Reserves

Proved reserves were 2.7 mmboe at year-end, up 2% from 2012 (+10% organic), and were 68% proved developed, up from 57%. Additions of 524 mmboe from drilling were offset by 30 mmboed of net negative revisions and 189 mmboe of divestitures for a reserve replacement of 126%.

Financial condition

Operating cash flow of $1.1B and $794M divestitures funded $1.5B CAPEX, $211M acquisitions, and ~$140M distributions. Chesapeake Energy Corporation (NYSE:CHK) still plans to outspend cash flow by $100-$300M this year, before capitalized interest. It plans $1B in non-core assets sales, in addition to the planned COS separation.