Independent oil and gas company, Chesapeake Energy Corporation (CHK) is set to release second-quarter 2014 financial numbers before the opening bell on Aug 6, 2014. Let's see how things are shaping up prior to the announcement.
In the last quarter, the company's earnings of 59 cents per share almost doubled year over year from 30 cents and surpassed the Zacks Consensus Estimate of 47 cents. The results were boosted by both higher price realizations and volume. Quarterly revenues also improved to $5,046.0 million from $3,424.0 million a year ago. The top line also got the better of the Zacks Consensus Estimate of $1,864.0 million.
Factors Influencing This Past Quarter
Chesapeake, the second largest U.S. natural gas producer after ExxonMobil Corp. (XOM), is gradually shifting its focus to more liquid-rich plays. The company earlier raised its 2014 total production growth outlook on an adjusted basis to 9–12% from 8–10%, to reflect higher-than-expected natural gas liquids volumes. It expects natural gas production to fall in the second quarter of 2014, while liquids production is expected to increase approximately 25–29% year over year. The growth drivers were higher-than-expected oil output from the Eagle Ford as well as gas yield from the Marcellus and improved liquids volumes.
Chesapeake remains one of the industry’s most active players in managing asset portfolio through a combination of acquisitions and disposals. With the biggest inventory of unconventional resource potential than probably any other domestic independent, Chesapeake boasts a leading position among the top unconventional liquids-rich plays, comprising Eagle Ford, Utica, Granite Wash, Cleveland, Tonkawa, Mississippi Lime and Niobrara and in the Marcellus, Haynesville/Bossier and Barnett natural gas shale plays.
For 2014, Chesapeake expects capital expenditure of $5,200–$5,600 million. We appreciate Chesapeake’s initiative of deploying more funds toward liquids. Given the downtrend in natural gas prices, the company intends to deploy the majority of its capex to drill liquids-rich plays in the near future. It plans to invest heavily in the development of its holdings in the Eagle Ford Shale, Granite Wash and Mississippi Lime.
Earnings Whispers
Our proven model does not conclusively show that Chesapeake is likely to beat earnings this quarter because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for that to happen. It is not the case here, as you will see below.
Zacks ESP: Chesapeake has an Earnings ESP of -6.82%. This is because the Most Accurate estimate stands at 41 cents while the Zacks Consensus Estimate is pegged higher at 44 cents.
Zacks Rank: Chesapeake carries a Zacks Rank #3 (Hold) which increases the predictive power. However, we need to have a positive ESP to be confident about an earnings surprise.
We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Other Stocks to Consider
Energy stocks that have both a positive ESP and a favorable Zacks Rank include:
Eagle Rock Energy Partners LP (EROC), Earnings ESP of +28.57% and a Zacks Rank #1 (Strong Buy).
Laredo Petroleum, Inc. (LPI), Earnings ESP of +5.88% and a Zacks Rank #2 (Buy).
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