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Chesapeake Releases Q4 Financial & Operational Updates

Zacks Equity Research
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Chesapeake Energy Corporation’s CHK fourth-quarter 2018 average production is estimated in the range of about 462,000-464,000 barrels of oil equivalent (boe) per day.

Fourth-quarter 2018 average oil production is estimated in the range of about 86,000-87,000 barrels of oil (bbls) per day. The production from the sale of Utica acreage, which represented about 10% of the company’s third-quarter oil production, has been completely replaced by oil volume growth in the Powder River Basin and Eagle Ford Shale in two months following the sale.

Net production exit rate at Powder River Basin in December 2018 was about 38,500 boe per day (that includes about 47% oil and total liquids of 60%). For 2019, the company projects volumes to more than double from 2018 levels. Currently, Chesapeake is operating five rigs in the Powder River Basin, all of which are drilling the Turner formation.

The premium Gulf Coast crude oil pricing has enabled Eagle Ford Shale in Texas to deliver highest margins in the company. Eagle Ford net production averaged about 105,000 boe per day (about 58% oil) for fourth-quarter 2018. The yield was better than expected primarily owing to strong well performance, greater volumes transferred through pipeline compared with trucking and new field technologies. Currently, Chesapeake is utilizing four rigs in the Eagle Ford as well as continues with its Austin Chalk and Upper Eagle Ford appraisal programs.

In the Marcellus Shale in Pennsylvania, Chesapeake continues to create significant free cash flow owing to higher realized in-basin gas prices. During the fourth quarter, two new Lower Marcellus records were set in northern Sullivan County. This reflects that proper development spacing along with longer laterals and better routing within the target zone can provide outstanding value. The other wells that were tested during the fourth quarter of 2018 are JOEGUSWA 4HC well and JOEGUSWA 5HC.

Capital expenditures for the fourth quarter are estimated at about $545 million, including $50 million of capitalized interest and Utica investments. Chesapeake intends to lower capital expenditures in 2019 by reducing rig count by about 20%. In 2019, the rig count is expected to average 14 compared with current count of 18. The company also anticipates improvement in capital efficiency in 2019 as total net capital per rig line is projected to fall 15-20% from 2018 levels.

The sale of Utica shale as well as debt refinancing has lowered leverage considerably and has about $2.5 billion in secured leverage. The company has sufficient liquidity and no significant near-term debt maturities. As of Dec 31, 2018, debt balance was about $8.2 billion including $419 million drawn on revolving credit facility compared with $10 billion as of Dec 31, 2017.

Zacks Rank & Key Picks

Currently, Chesapeake carries a Zacks Rank #3 (Hold).

A few better-ranked players in the energy space are Valero Energy Partners L.P. VLP, Shell Midstream Partners, L.P SHLX and Unit Corporation UNT, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Valero Energy Partners is involved in the ownership, development and acquisition of crude oil and refined petroleum products pipelines, terminals as well as other transportation and logistics assets. The partnership delivered average positive earnings surprise of 3.7% in the last four quarters.

Headquartered in Houston, TX, Shell Midstream Partners owns, operates, develops and acquires pipelines as well as other midstream assets. The company is expected to witness year-over-year earnings growth of 18.7% in 2018.

Unit Corp is a diversified energy company. The company has an average positive surprise of 21.2% in the last four quarters.

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