Chesapeake Energy 4Q Profit Falls 36%

Chesapeake Energy Corp.'s fourth-quarter earnings fell 36% despite higher revenue, as the natural-gas producer pared its crushing debt.

The earnings report gave investors their first glimpse of Chesapeake, the country's second-largest gas producer after Exxon Mobil Corp., without longtime Chief Executive Aubrey McClendon at the helm. Mr. McClendon, who led the Oklahoma City-based company during an epic growth spurt, is retiring from the company on April 1 under pressure from the company's largest shareholders.

The energetic executive, who normally dominates earnings calls, let Chief Operating Officer Steve Dixon take the lead on Thursday.

Mr. Dixon restated Chesapeake's commitment to now focus on harvesting the oil and natural gas from its existing acreage and continuing to sell assets to bridge a $4 billion funding gap as it shifts its focus from natural gas to more profitable oil production.

"To this end during the past year, all of our assets teams have been retasked and incentivized to shift their focus from acreage capture mode to meeting budgets and delivering higher returns on capital," Mr. Dixon said during the call.

Overall, Chesapeake reported a profit of $300 million, or 39 cents a share, down from $472 million, or 63 cents a share, a year earlier. Excluding debt-repurchase expenses, hedging impacts and other items, adjusted earnings fell to 26 cents a share from 58 cents. Revenue climbed 30% to $3.54 billion.

Analysts polled by Thomson Reuters had projected earnings of 14 cents a share and revenue of $2.86 billion.

Chesapeake and other producers that pioneered hydraulic fracturing have become victims of their own success. The drilling boom they unleashed greatly increased the amount of natural gas produced from shale formations, causing prices for the commodity to collapse and putting a dent in their expansion plans.

Chesapeake lowered its estimate for gas prices in 2013 and projected its total output will fall by roughly 7% due to a drop in natural-gas production, even as its production of oil and natural-gas liquids will rise by 27%.

The prolonged fall in prices caused Chesapeake to slash its reserves in the fourth quarter by 16% to 15.7 trillion cubic feet of oil and natural gas.

Average daily production was flat sequentially but rose 9.3% from a year ago, led by oil production, which grew to 15% of total production from 10%. Average realized prices for oil improved 4.8%, while those for natural-gas and natural-gas liquids weakened sharply. Chesapeake said it sold natural gas for $2.02 per million British thermal units in the fourth quarter, a year-over-year decline of more than 20%.

Chesapeake said it made headway in curbing spending. The company said it spent $1.4 billion on drilling and leaseholding in the fourth quarter, down from $2.4 billion the quarter before. The company also said its long-term debt fell by $3.6 billion from the third quarter, to $12 billion.

"Cost control and lower capex in the quarter was a pleasant surprise," said Jefferies analyst Biju Perincheril in a client note. "The challenge, however, for the new management will be bringing operations to near cash flow neutral status without greatly sacrificing its upside potential."

Chesapeake has long been optimistic about natural-gas prices, but it said it hedged 50% of its 2013 natural-gas output at $3.62 per million cubic feet. The hedge may be a sign of lessening appetite for risk, analysts said. It hedged 85% of its oil output at $95.45 a barrel.

On Wednesday, Chesapeake's new board said an internal investigation under way since April found no wrongdoing in Mr. McClendon's controversial personal-financing methods. The probe covered a loan Mr. McClendon received from a former board member, the trading activities of a hedge fund he helped run until 2007, and his borrowing from firms that do business with Chesapeake.

While a Chesapeake without Mr. McClendon might satisfy many investors, including the large shareholders that led the revolt against him, some analysts will miss the executive's electrifying style. Chesapeake didn't have "the same flair on the conference call without McClendon," Morningstar's Mark Hanson said.

Chesapeake shares were up 0.44% at $20.33.

Tess Stynes and Daniel Gilbert contributed to this article.

Copyright (c) 2012 Dow Jones & Company, Inc.


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