uploads///CHK Production and Guidance

Did Lower Natural Gas Prices Lead to Chesapeake’s Reduced Guidance?



Chesapeake Energy’s production costs

For 4Q15, Chesapeake Energy’s (CHK) total production cost was $21.54 per boe (barrel of oil equivalent). This includes production expenses, gathering and transportation expenses, G&A (general and administrative) costs, production taxes, and DD&A (depreciation, depletion, and amortization) expenses.

For 4Q15, Chesapeake Energy’s total average realized price for its production was ~$21.58 per boe. This means that CHK has a higher total production cost than its total average realized price.

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CHK’s production trend

As seen in the above chart, NYMEX natural gas (UNG) prices peaked in 1Q14, whereas CHK’s quarter-over-quarter production peaked four quarters later, in 4Q14. Since their peaks, natural gas prices and CHK’s production are down by ~71% and ~9%, respectively.

Lower natural gas prices reduce the operating margin, and so upstream companies tend to decrease production in a low price environment.

Chesapeake Energy’s 4Q15 production and 2016 guidance

For 4Q15, Chesapeake Energy (CHK) reported total production of ~663 Mboe (thousand barrels of oil equivalent) per day, which is lower by ~9% when compared with its 4Q14 production of ~728 Mboe per day. Sequentially, CHK’s 4Q15 production was almost flat when compared with its 3Q15 production of ~666 Mboe per day.

For 2016, CHK expects total production volume in a range of 605 Mboe to 635 Mboe per day, a midpoint reduction of ~9% when compared with its 2015 production of ~680 Mboe per day. As we have seen above, CHK has higher production costs and hence, its lower production and reduced guidance can be attributed to the negative margin per boe of production.

Other upstream players

Other upstream companies like Diamondback Energy (FANG), Consol Energy (CNX), and Pioneer Natural Resources (PXD) have reported ~46%, ~35%, and ~7% year-over-year increases, respectively, in their 4Q15 total production. Energen Corporation (EGN) reported an ~11% year-over-year decrease in its 4Q15 total production.

Movements in natural gas prices also affect the VelocityShares 3x Long Natural Gas ETN (UGAZ) and the VelocityShares 3x Inverse Natural Gas ETN (DGAZ).

Next, it’s time to look at how reduced production guidance can affect Chesapeake Energy.


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