Chesapeake Story from today's Barrons Online:
MONDAY, AUGUST 4, 2008
HOT RESEARCH PM
Chesapeake Energy Rigged for Upside
The energy company's second quarter and guidance were strong.
Chesapeake Energy (CHK: NYSE)
By Coker & Palmer ($49.22, Aug. 4, 2008)
WE ARE UPGRADING Chesapeake Energy (ticker: CHK) from a Accumulate to Buy and increasing our 12-month price target from $58 to $68, based on 2009 multiples of 6.0 times cash flow per share and 7.0 times earnings before interest, taxes, depreciation and amortization.
Chesapeake had a solid second quarter, reporting recurring earnings per share of 89 cents, exceeding our estimate of 79 cents and consensus of 87 cents. Cash flow per share of $2.70 also handily beat our estimate of $2.31 and consensus of $2.36. Production of 209.6 billions of cubic feet equivalent (Bcfe) per day exceeded our estimate of 204.3 Bcfe, and contributed to the strong financial performance.
On its conference call, Chesapeake came out swinging on the Haynesville shale, remaining very positive with impressive results to back it up. To date, the company's 11 horizontal wells have produced at initial rates between 5 million and 15 million cubic feet equivalent per day (MMcfed), all on restricted chokes and high flowing casing pressure, indicating that the wells could flow at substantially higher rates. Chesapeake plans to exit the year with 12 rigs in the play and should be completing a new well every five days on the play, so the data flow from the play is poised to ramp.
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Chesapeake has begun to capitalize on its massive acreage position by becoming a net seller of properties. During the year, Chesapeake could receive as much as $8.75 billion in capital, most of which would be in the second half of the year. These asset sales would improve the company's balance sheet and help fund aggressive development in new areas such as the Haynesville and Marcellus shales. Additionally these sales would accelerate the present value and provide a market valuation to them. With such a substantial inventory, much of this acreage was unlikely to be developed for a number of years, and transactions such as the Plains Exploration and Production (PXP) and BP (BP) deals, not only give the company cash up front, but a partner to help accelerate development and share the risk.
Chesapeake continues to be positive on the Marcellus Shale. The company completed two horizontal wells in West Virginia that are currently producing 7 MMcfed combined and together have gross reserves of about 11 Bcfe. Chesapeake has about 1.6 million net acres in the play, and is likely to pursue a Plains-type deal for 25% of its acreage and is also pursuing a similar deal for its 550,000 net core acres in the Fayetteville Shale. While the Barnett and Fayetteville are the current drivers of the company's growth, the Haynesville and Marcellus should begin to drive growth in 2009 and beyond.
--Michael D. Bodino
--Brian M. Corales
--Michael A. Glick |
