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Gold/Mining/Energy : Chesapeake Energy CHK

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From: Dennis Roth	2/22/2008 8:31:38 AM
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Chesapeake Energy Corp. (CHK): Another quarter of higher-than-expected production, cash flow, debt - Goldman Sachs - February 22, 2008 News Chesapeake reported 4Q 2007 adjusted EPS of $0.93 versus our estimate of $0.78 and First Call consensus estimate of $0.81.Total production was already reported at 2.22 Bcfe/d versus our 2.15 Bcfe/d. Operating cash flow was $1.3 billion versus our $1.2 billion estimate. Net debt rose slightly versus 3Q 2007 despite $1.1 billion in asset sales. While headline production guidance was maintained for 2008 and 2009, after impact of volumetric production payments guidance rose by about 90 MMcfe/d in 2008 and 135 MMcfe/d in 2009. Management raised E&P capital spending guidance by $550 million for 2008 and 2009. Analysis Chesapeake continues to beat production guidance as well as consensus estimates. At the same time, we have seen a trend of greater-than-expected spending and debt, and capital spending appeared well in excess of guidance for the quarter. The modest quarter-on-quarter rise in debt levels reflects Chesapeake’s stepped-up plans to monetize assets via volumetric production payments (in which Chesapeake is still responsible for operating costs of sold reserves) and an expected private midstream Master Limited Partnership with a goal of maintaining flat net debt. Ultimately, beating estimates without an increase in capital spending should raise the likelihood of equity outperformance, in our view. Implications Through its acreage and producing property acquisitions, Chesapeake has built a vast position in most of the key emerging shale and tight gas resource plays in the US. Evidence that other companies are embarking or will need to embark on their own “land grab” at much higher prices than Chesapeake is a key catalyst for Chesapeake’s multiple to expand. Chesapeake remains exposed to our bullish view on natural gas prices, though our Neutral relative to an Attractive coverage view reflects our preference for other stocks at present.

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