Has Chesapeake Energy Really Done as Terribly as It Seems?

Tickers in this article: CHK CVX

NEW YORK ( TheStreet) -- Chesapeake Energy recently failed to meet market expectations on its earnings per share in its second-quarter earnings report. Analysts estimated the adjusted EPS to reach 44 cents a share, while the company's actual EPS was 36 cents a share -- 8 cents lower than market projections.

Does this mean the company didn't reach its quarterly goals in terms of production and costs?

Let's analyze the progress of Chesapeake in the past quarter and see if it actually did as poorly as it seems.

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Despite the lower-than-anticipated EPS, Chesapeake Energy ended yesterday with a modest gain of 13 cents to $26.19 a share. And as of 1 p.m. Thursday, shares were down 1% to $25.94.

Other oil and gas producers such as Chevron also rallied yesterday and finished with a 0.62% increase to settle at $125.73 a share. Thursday Chevron sank to $125.41, off 0.25% as of 1 p.m.

During the second quarter, Chesapeake Energy reached its quarterly output goals as the total oil equivalent production was 63.2 million barrels of oil equivalent -- nearly 2.6% above the volume recorded in the second quarter last year. Most of the gain came from the rise in the company's natural gas liquids output, which grew by 62%, year over year.

Looking forward , Chesapeake Energy revised up its daily oil equivalent production to an average of 695,000 barrels of oil equivalent, a 1.5% gain from the previous estimate. This higher yield is likely to increase its sales in the coming quarters.

The company also improved its production costs in the past quarter, which had a positive impact on the profit margin. Alas, the main reason for the drop in earnings per share was the very low realized prices of oil and natural gas. These prices were not only lower than expected but also well below the realized prices recorded in the second quarter last year.

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The reason for the low realized prices is the company's hedging policy, which includes buying and selling options to hedge against sharp moves in the prices of oil and natural gas. If prices fall below a certain price level or rise well above a target price, Chesapeake Energy pays up. In the second quarter, the company recorded a net loss of $213 million from these derivatives. Thus, Chesapeake Energy's realized price of oil (including realized losses derivatives) comes to only $85 a barrel, while the market price of oil was $103 a barrel. Realized natural gas prices were only $2.45 per 1,000 cubic feet of gas, while the average market prices reached $4.6 per 1,000 cubic feet during the second quarter.