Original Source: FD (FAIR DISCLOSURE) WIRE
. Aubrey McClendon, Chesapeake Energy Corporation, Chairman, CEO . Mark Rowland, Chesapeake Energy Corporation, EVP, CFO . Tom Price, SVP,Chesapeake Energy Corporation, Investor and Government Relations
Co. announced 3Q03 net income of $82m, operating cash flow of $248m and EBITDA of $285m, all records for the company. No earnings guidance was given, buy production forecasts of 74-74.5 bcfe for 4Q03 and 269-270 bcfe for FY03 were cited. Q&A Focus: acquisitions, hedging success, exploration.
A. Key Data From Call 1. 3Q03 net income = $82m. 2. 3Q03 operating cash flow = $248m. 3. 3Q03 EBITDA = $285m. 4. FY04 capex guidance = $675-725m.
S1. 3Q03 Results (A.M.) 1. Excellent Quarterly Results 1. Net income was $82m. 2. Operating cash flow $248m. 3. EBITDA was $285m. 1. All these results were co. records. 4. Strong financial results driven by strong operational performance. 5. Oil and gas production reached record level of 71.0 bcfe. 1. Ninth consecutive quarter of record production. 6. Daily production of 692m cubic feet of gas and 13,220 barrels of oil and natural gas liquids, for gas equivalent production rate of 772m cubic feet of gas equivalent per day. 2. Production was up 52% from year ago, and 5.4% sequentially. 1. One-third of sequential increase came from drill bit growth and two-thirds from acquisitions.
2. Annualized organic growth rate was 8%, about double projection.
3. Reason for higher than expected organic growth is ongoing
exceptional performance of exploratory drilling. 4. Testament to high caliber of exploration, high quality of land and 3D seismic inventories, which continued to grow. 5. Invested another $42m in undeveloped leasehold and 3D seismic, raising total capital invested in past two years to $200m. 6. Investment in undeveloped land and seismic are building blocks for future. 7. Willingness to make these investments is a key reason why co. has been able to keep growing through drill bit, despite being 50% bigger than a year ago. 8. Recently opened new geosciences building, with
state-of-the-art 3D visualization room, only one in Oklahoma.
9. Ongoing commitment to excellence and exploration are the
primary reasons co. believes it can continue delivering strong
organic growth at attractive finding costs. 10. Due to especially strong operation, for fourth time have increased 2003 production forecast. 1. 4Q03 forecast is now for 74-74.5 bcfe. 2. FY03 forecast is for 269-270 bcfe. 11. Have also increased 2004 production forecast to 297-303 bcfe, a projected 11% increase in production vs. 2003. 12. Estimated proved reserves have reached 3.0 tcfe, an increase of 36% so far this year. 1. None of these numbers include approx. 100 bcfe in approved reserves acquired in Laredo transaction. 3. Continuing cost control. 1. Lease operating expenses of $0.51 per mcfe and G&A costs of $0.08 are among lowest in industry. 2. Interest expense continues downward trend as production increases far outweighed any leverage increases in the past few years. 3. DD&A rate increased just 1% since 2Q03, reflecting ability to store, forward, acquire and develop new reserves of natural gas. 4. Pleased with record of building and maintaining one of the best cost structures in the industry, yet especially proud of accomplishments from enhancing revenue line. 5. Want to continue grinding costs down, but that effort is measured in pennies per mcfe. 6. Biggest money is made on the top line. 7. Because of the extreme volatility in gas prices, management of revenues is equally important to managing cost.
8. Cost structure is and will remain a key element of business
strategy. 9. Best performers in industry are likely to be co.'s that can be price makers not price takers. 10. Since 2001, have enhanced top line by $125m through astute hedging decisions and are currently up another $130m. 11. As for open hedges, for 4Q03, have locked in 100% of oil production at NYMEX prices of $28.69 per barrel and 83% of gas production at NYMEX price of $5.64 per mcfe. 1. On a gas equivalent basis, have hedged 85% of 2003 production at $5.56 per mcfe. 12. If December gas prices end up closing at $4.50 per mcf or so, hedging gains should exceed $70m for 4Q03. 13. For 2004, have hedged 94% of projected oil production at NYMEX price of $28.61 per barrel and 51% of projected gas production at NYMEX price of $5.28 per mcf.
1. On a gas equivalent basis, have locked in 54% of 2004 production at $5.23 per mcfe. 14. Most sell side analysts are using 2004 gas price forecast of NYMEX price of $3.75-4.25 per mcf 1. Using $4.00, middle of range, 2004 hedges should create $175m of additional cash flow or about $0.80 per common share. 1. If invested wisely, represents 7% increase in net asset value next year, just through existing hedge positions. 15. Trick is to hedge high prices.
1. Track record is among the best in the industry and a key reason why stock has been a leading performer during the past few years. 1. Also a reason why CEO and CFO have invested over $25m in
purchasing co. stock on open market over the past year. 2. Believe CHK represents great value today and even better value in the years ahead. 4. Acquisition Announcement: 1. Excited about acquisition of $200m of south Texas gas property. 1. Some wonder if co. strayed off message. 2. Maybe from a purely geographic perspective, but not from a gas or operating expertise perspective. 3. Co. will continue focusing on mid-continent; however, it's not the only area where understanding of deep gas reserves can create value.
4. In 3Q, 11% of production came from outside mid-continent.
5. Pro forma for Laredo, 14% of production will come from outside mid-continents. 6. Plan to keep in range of 10-20% in the near future. 7. Will remain active in areas where returns can be generated
that are competitive with mid-continent returns. 2. In south Texas, have been building strong land, geological and operational teams. 1. See other similarities in South Texas to mid continent,
tough land issues, fragmented ownership base, pipe line infrastructure, high operating margins, complicated geology, good weather, underexplored deep potential. 2. Have locked in excellent returns from the Laredo acquisition by hedging 100% of first 14 months of production at NYMEX price of $5.28 per mcfe. 3. Being able to hedge $5.00-plus gas is especially helpful because CHK is not a strip price bidder.
5. Details on Laredo Acquisition: 1. For $200m, purchased 30m per day in current production. 2. Within one year, co. believes it will increase by 50% with further growth potential in outyears.
3. As for reserves, acquired 196 bcfe of reserves, 108 of which