Chesapeake’s revenues directly relate to how much oil and gas it produces
Chesapeake’s revenues come from selling the natural gas and oil that it produces. The company puts out annual guidance for the production it expects to be able to get to market and sell. When the company reported 3Q13 results, it made a change to its production guidance that should have a positive effect on its revenues.
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How did Chesapeake’s production guidance change?
Chesapeake’s prior guidance for 2013 production was as follows:
The new guidance is as follows:
Why the changes are positive for revenue
The changes to Chesapeake’s expected production for 2013 are positive, as the company shifted its guidance for natural gas and natural gas liquids production downwards, and shifted guidance for oil production upward. This should benefit the company’s revenues because, currently, oil is commanding the highest revenues on a per-unit basis. West Texas Intermediate crude oil is currently trading at roughly $95 per barrel. In comparison, natural gas liquids are currently trading at roughly $40 per barrel, and natural gas is trading at roughly $3.60 per million British thermal units (which equates to approximately $22 per barrel, using the industry standard of a six-to-one conversion ratio for MMBtu of natural gas to barrel of oil).
Given that Chesapeake is increasing expected production of oil, a commodity that commands a higher price than natural gas liquids and natural gas, CHK is effectively increasing its revenue guidance.
On the cost side, Chesapeake also had positive things to say, which we’ll discuss in the following part of this series.