Chesapeake's Oily Capital Layout - Analyst Blog

Chesapeake Energy Corporation (CHK) announced its plan to increase oil output and deploy 90% of its total capital to drill liquids-rich plays in 2013. The estimated capital expenditure for 2013 is $7 billion.

In view of the steep drop in gas prices, Chesapeake –  the second largest natural-gas production company behind Exxon Mobil Corporation (XOM) – plans to boost oil yield. The company’s strategy faced a setback in the first quarter as it failed to meet its oil-production target. Of the total capex allocated for liquids drilling in 2013, approximately 40% will be set aside for drilling in the liquids-rich Eagle Ford shale formation in South Texas.

Although gas prices have fallen below $3 a million British thermal units and touched a low of $1.90 in late April, it is believed to have started improving. Thus, Chesapeake still expects to assign 7% of the company’s capex in 2013 for dry gas production.

Given the uptrend in oil prices, the company intended to deploy 85% of its capex to drill oil fields in 2012. The spending will be primarily targeted towards Eagle Ford Shale, Utica Shale, Mississippi Lime, Granite Wash, Cleveland, Tonkawa, Niobrara, Bone Spring, Avalon, Wolfcamp and Wolfberry.

Chesapeake expects its 2012 as well as 2013 total production to be approximately in the range of 1,268–1,332 billion cubic feet of gas equivalent (Bcfe) and 1,464–1,528 Bcfe, respectively.

For 2012 and 2013, liquids production forecast range is 53–57 million barrels (MMBbls) and 74–78 MMBbls, respectively. Chesapeake expects its natural gas production in the bands of 950–990 Bcf and 1,020–1,060 Bcf for 2012 and 2013, respectively.

The current Zacks Consensus Estimates for Chesapeake are for earnings of 60 cents and $1.81 per share for fiscal years 2012 and 2013, respectively. The estimates represent a year-over-year decline of 78.4% for 2012 and growth of 199.7% for 2013.

Chesapeake holds a Zacks #3 Rank, which translates to a Hold rating for a period of one to three months. For the long term, we maintain a Neutral recommendation on the stock.