Chesapeake posts 1Q loss on hedging bets

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Posted: May 02, 2011 7:32 PM
Chesapeake posts 1Q loss on hedging bets

Chesapeake Energy Corp. said Monday that it slid to a loss for the first quarter after booking hefty losses on energy hedging bets.

Chesapeake executives touted the company's gas-price hedging program back when natural gas prices rose to a high of $13.69 per 1,000 cubic feet during the summer of 2008. But those prices soon plummeted _ natural gas closed at $4.763 per 1,000 cubic feet on Monday on the New York Mercantile Exchange _ meaning that hedging program ended up costing Chesapeake financially.

Losses for the quarter totaled $205 million, or 32 cents per share. A year earlier the independent Oklahoma City-based natural gas and oil producer reported a profit of $732 million, or $1.14 per share. Chesapeake marked down the value of hedges designed to lock in energy prices by $725 million.

Revenue fell 42 percent to $1.61 billion from $2.8 billion a year ago.

Excluding special items, however, Chesapeake earned $518 million, or 75 cents per share. That topped the 71 cents expected by analysts, according to FactSet. CEO Aubrey McClendon will discuss his company's latest earnings report with analysts during a Tuesday conference call.

In a letter to shareholders Friday, McClendon called 2010 "a year of transition and achievement" for Chesapeake even though "our stock price was essentially unchanged. Nevertheless, it was still a very strong year for the company operationally and financially."

Chesapeake long has been known for its laser-like focus on natural gas production, particularly from unconventional shale formations. But during 2010, the company made an aggressive move into oil and natural gas liquids production, with McClendon noting oil prices would outperform natural gas prices over the long term.

The company said Tuesday that its daily production for the first quarter was up 20 percent from the 2010 first quarter and rose 6 percent from the fourth quarter of last year. Chesapeake said its year-over-year growth rate of natural gas production was 16 percent, but for oil and natural gas liquids, it was 56 percent.

Chesapeake's plan is to cut debt by 25 percent during 2011 and 2012 while increasing natural gas and oil production by 25 percent during the same period. The company wants to cut its debt by selling assets. On March 31, Chesapeake closed on the sale of its Fayetteville Shale assets in Arkansas to BHP Billiton Ltd. of Australia, which netted Chesapeake about $4.65 billion.

McClendon told shareholders in the letter that Chesapeake "anticipated the some market unpopularity in 2010 would likely be the price we would pay as we positioned Chesapeake to be the leader not only in unconventional U.S. natural gas, but also in unconventional U.S. liquids."

"However, now that we have largely completed the investments needed to accomplish this transition to a portfolio balanced with liquids, the rebound in our stock price could be sharp as investors being to focus more clearly on Chesapeake's three-way transition from an asset gatherer to an asset harvester, from less natural gas exposure to more liquids exposure and from a leveraged balance sheet to one worthy of an investment grade rating," he added.

Chesapeake's stock closed Monday at $33.23, down 44 cents.