Examining how commodity prices relate to Chesapeake’s 2Q13 results
The table below summarizes Chesapeake Energy’s 2Q13 performance. It was found on the company’s website in the “Investors” section.
In the three months ended June 30, 2013, Chesapeake produced 278 billion cubic feet equivalent of natural gas, 10,539 thousand barrels of oil, and 4,751 thousand barrels of natural gas liquids. Chesapeake notes that it received an average price of $2.62 for each mcf (thousand cubic feet) of natural gas produced, an average price of $93.81 for each barrel of oil produced, and an average price of $24.22 for each barrel of natural gas liquids produced.
So its cash revenues from hydrocarbons for the quarter are: natural gas production * average realized natural gas sales price + oil production * average realized oil sales price + natural gas liquids production * average realized oil natural gas liquids price. This equates to natural gas revenue of (278,000,000 * $2.62) $728.4 million, oil revenue of (10,539,000 * $93.81) $988.7 million, and natural gas liquids revenue of (4,751 * $24.22) of $115.1 million, or total cash revenue of ~$1.83 billion.
Note that increases and decreases in the prices of commodities directly affect the revenue that CHK receives for its production. For example, CHK produced 278 bcf of natural gas in 2Q13 and received on average $2.62 for each mcf of gas produced. If natural gas prices for the quarter were $0.10 per mcf lower, CHK would have received less revenue of ~$28 million (278,000,000 * $0.10), assuming the company has no hedges in place to protect against downward price movements in commodities. (In reality, Chesapeake and many upstream companies have hedges in place. However, we’ve assumed no hedges to simplify this example.)
Energy companies produce commodities and therefore can’t set sales prices
Note that E&Ps largely can’t control the price they sell their products at, as what they produce are commodities, and the prices for commodities are determined by supply and demand in the marketplace. This is unlike a company such as Apple, which sets the prices it wishes to sell its products at.
Watch commodity prices when investing in upstream energy names and related ETFs
For investors in upstream energy names such as Chesapeake Energy (CHK) as well as ETFs containing upstream energy names such as the Energy Select Sector SPDR (XLE), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the VanEck Vectors Unconventional Oil & Gas ETF (FRAK), and the iShares US Oil & Gas Exploration & Production ETF (IEO), commodity prices are important indicators to watch.
Market Realist examines how commodity prices moved this past week in the following parts of this series.