Chesapeake Profit Rises as Shift From Gas to Oil Pays Off

Chesapeake Energy Corp. (CHK), the second- biggest U.S. natural-gas producer, said fourth-quarter profit more than doubled as the company boosted oil output amid record crude prices.

Net income was $429 million, or 63 cents per share, compared with $180 million, or 28 cents, a year earlier, the Oklahoma City-based company said today in a statement. Excluding one-time gains and losses, per-share profit was one cent lower than the average of 10 analysts’ estimates compiled by Bloomberg.

Chief Executive Officer Aubrey McClendon is seeking $12 billion from sales of oil fields, drilling rigs and pipelines this year to close a funding gap caused by tumbling gas prices. So far, Chesapeake isn’t making the transition away from gas production toward more crude as quickly as expected, said Mike Kelly, an analyst at Global Hunter Securities in Houston.

“Investors want reassurances that they still are set to hit their production targets,” Kelly, who has a “buy” rating on the shares, said today in a telephone interview. “Any color they can provide to delineate how they intend to make that transition will be well received.”

Focus on Oil

McClendon has been shifting his focus to oil as new, intensive drilling techniques that opened previously impenetrable rock formations created a glut of North American gas, depressing prices for the furnace and factory fuel. During the fourth quarter, output of crude and gas liquids such as propane rose 13 percent compared with the prior three-month period, less than the 20 percent increase Kelly expected.

The statement was released after the close of regular U.S. stock trading. Chesapeake fell 9 cents to $24.62 at the close in New York. The stock has 17 buy ratings from analysts, 16 holds and four sells.

Without this year’s planned asset sales, Chesapeake faces a $4 billion shortfall between cash flow and exploration costs, RBC Capital Markets said in a Feb. 13 note to clients. The company’s capital spending exceeded cash from operations in every quarter since October 2003, according to data compiled by Bloomberg.

Chesapeake is also saddled with a net debt load that is twice the size of Exxon Mobil Corp. (XOM)’s, a company with a market value 27 times larger. During the third quarter of 2011, as U.S. gas futures were dropping 16 percent, Chesapeake swelled its net debt by 18 percent to $11.678 billion.

Asset Sales

Chesapeake raised $16.3 billion from asset sales since July 2008, equivalent to almost half the company’s total revenue during that period, according to data compiled by Bloomberg.

Chesapeake said today that it has curtailed about 1 billion cubic feet of daily gas production in response to the expanding supply glut and depressed prices. The cuts occurred primarily in the U.S. shale regions known as the Haynesville and Barnett, the company said.

Chesapeake plans to reduce the number of rigs drilling for dry gas by 68 percent to 24 by the end of next month, according to the statement. The company is slashing its dry-gas drilling budget by 70 percent this year to about $900 million, the lowest since 2005.

The number of rigs searching for crude and gas liquids will jump to 133 this year from 92 in 2011, the company said. Chesapeake plans to escalate liquids output to 150,000 barrels a day this year and more than 200,000 barrels a day in 2013, according to the statement.

Liquids Content

Oil and gas liquids accounted for 18 percent of Chesapeake’s overall production during the October-to-December period, up from 12 percent a year earlier, according to today’s statement.

Chesapeake is sensitive to falling gas prices, with every 25-cent decline reducing the company’s cash flow by 5.4 percent, Brian Gibbons, a credit analyst at CreditSights, said in a Feb. 7 note to clients.

Gas declined to a 10-year low of $2.231 per million British thermal units on Jan. 23, after plunging 41 percent in 2011. Crude averaged $94.06 a barrel during the final three months of last year, a record for any fourth quarter.

Exxon, based in Irving, Texas, is the largest U.S. gas producer, according to the Natural Gas Supply Association, a Washington-based industry group whose members produce about one- third of the nation’s gas.

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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