Don't Ignore This Company's Goals

The recent earnings report numbers from this leading drilling company are only disappointing to those who refuse to consider the company's goals and progress towards said goals, writes MoneyShow's Jim Jubak, who prefers to look at the big picture instead.

The nagging worries about the sustainability of the US energy boom, built around producing oil and natural gas from shale, seem to have found a temporary (at least) home in the shares of Chesapeake Energy (CHK) after the company reported fourth quarter earnings after the close the day before yesterday, on February 26. (Chesapeake Energy is a member of my Jubak's Picks portfolio.)

Earnings of 27 cents a share were 12 cents a share below the Wall Street consensus. (Adjusted EBITDA—earnings before interest, taxes, depreciation, and amortization—climbed 4% year over year.) Revenue rose by 28.3% year over year to $4.54 billion versus the $4.4 billion analyst projection. Daily production averaged 665,000 barrels of oil equivalent. That's an increase of 2% from the fourth quarter of 2012 and a drop of 1% from the third quarter of 2012. Average daily production for the quarter broke down this way: 111,300 barrels of oil, 63,700 barrels of natural gas liquids, and 2.9 billion cubic feet of natural gas.

Those results are a disappointment only if you ignore the company's goals and the progress toward them these numbers represent. (The shares finished up 1.13% yesterday.) After digging itself a deep, deep financial hole, as it emphasized growing leased acreage over production, the company has turned around its finances through a series of asset sales. In the post earnings release conference call, Chesapeake said it no longer needs to sell assets to survive or to fund capital spending programs. The company said it is still pursuing a sale or spin-off of its oilfield services unit—Chesapeake is unusual among oil and natural gas exploration and production companies in that it owns its own drilling rigs rather than leasing them from an service company. But that is now a question of how best to deploy capital rather than a required fire sale.

All that represents good progress toward the company's goals of profitably, exploiting the huge reserves that the company does control. At the end of December, Chesapeake's proved reserves came to 2.7 billion barrels of oil equivalent. That's a 2% increase from the end of 2012.

What set off some alarms, however, was an increase in costs that reduced operating cash flow per barrel of oil equivalent to $16.26 for the quarter, from $18.88 in the fourth quarter of 2012. Much of that was a result of costs that Chesapeake incurred as it reduced the size of its operations in order to ultimately increase its return on capital. But in the short run, that $120 million to end a lease obligation in Fort Worth, and the $154 million in restructuring, and employee termination costs, hurt earnings and cash flow.

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