Chesapeake Swings to Profit as Demand Spike Boost Prices

Chesapeake Energy Corp., the U.S. natural gas producer that replaced its top executive last month amid conflict-of-interest questions, reported profit that beat analysts’ estimates as fuel prices rallied on increased demand.

First-quarter net income was $58 million, or 2 cents a share, compared with a loss of $28 million, or 11 cents, a year earlier, the Oklahoma City-based company said in a statement today. Excluding non-cash hedging losses and employee severance expenses, per-share profit was 5 cents more than the average of 28 estimates compiled by Bloomberg.

The company cut costs as production rose to a first-quarter record and Texas well output prompted it to boost its 2013 oil target by 1 million barrels. Chesapeake, which pumped enough gas last year to supply one-fourth of U.S. households, replaced Chief Executive Officer Aubrey McClendon on April 1 after an investor revolt and boardroom overhaul failed to resurrect the languishing stock.

“The new board is imposing a good amount of spending discipline and the company has turned a corner,” Mark Hanson, an analyst at Morningstar Inc. in Chicago, said in a phone interview today. “Chesapeake is going the right way and their core properties continue to deliver” production growth.

Sales increased by 42 percent to $3.42 billion in the quarter. Chief Financial Officer Domenic Dell’Osso estimated a 2013 cash flow shortfall of $3.5 billion during a conference call with analysts today. He reiterated the company’s target of $4 billion to $7 billion in asset sales.

Gas Prices

Gas futures in New York jumped 39 percent during the quarter to average $3.48 per million British thermal units as cold weather in some of the biggest U.S. cities spurred demand for the furnace fuel.

Even as Chesapeake has emphasized the search for oil and so-called natural gas liquids such as propane, gas accounted for 76 percent of the company’s first-quarter output. Prices touched a 20-month high of $4.43 on April 18, as a glut from North American shale formations that caused prices to decline to a decade-low in 2012 began to ease.

Crude production from Chesapeake’s wells jumped 55 percent to 103,000 barrels a day, according to today’s statement. Liquids output rose by 13 percent and gas increased by 0.7 percent, the company said. Production costs fell 18 percent to the equivalent of 86 cents per thousand cubic feet of gas.

Cash Squeeze

Chesapeake declined 1.8 percent to $19.19 at the close in New York as a slump in commodities markets dragged energy stocks lower. The shares have increased 15 percent this year, more than double the gain for the Standard and Poor’s 500 Energy Index of 43 companies.

The cost to protect Chesapeake’s debt from default for five years fell to the lowest since August 2011. Credit-default swaps declined 10 basis points to 289 basis points as of 12:03 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the amount of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Chesapeake has outspent cash flow for most of the past two decades as it amassed prospective gas and oil fields faster than it could afford to drill wells. Chesapeake is seeking to raise cash from asset sales to cover its funding gap and reduce debt. The company signed agreements last year to sell $12 billion in properties, short of McClendon’s original target.

Selling Pipes

In a separate statement today, SemGroup Corp. said it has agreed to pay Chesapeake $300 million in cash for Mid-America Midstream Gas Services, a subsidiary that owns pipelines and processing plants in the Mississippi Lime formation.

McClendon, 53, was ousted as chairman in 2012 and ultimately lost the CEO’s post after investors including Carl Icahn and Southeastern Asset Management Inc.’s O. Mason Hawkins objected to management missteps and stagnating performance. A board inquiry into McClendon’s use of personal stakes in thousands of company-owned wells to obtain more than $800 million in private loans cleared him of any intentional wrongdoing in February.

“The biggest thing they got going for them is they got rid” of McClendon, Ben Dickey, chief investment officer at BSG&L Financial Services LLC in Houston, said in an interview before the results were announced. “If gas prices continue coming back, that’ll be good for them.”


McClendon was replaced as CEO of the company he co-founded almost a quarter century ago by one of his longest-serving lieutenants, Chief Operating Officer Steven Dixon. Dixon assumed the title of acting CEO while the company searches for someone to fill the role permanently, Chesapeake said in a March 29 statement.

“We’re beginning to see the benefits of our operational strategy shift from identifying and capturing new assets to developing our extensive, existing assets as we enter a new era of shareholder-value realization,” Dixon said during the call today. “As a result, we’re generating more efficient production growth, stronger cash flow and better returns on capital.”

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