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Natural gas provider Chesapeake Energy Corp. (CHK) reported adjusted fourth quarter 2012 earnings of 26 cents per share, beating the Zacks Consensus Estimate of 14 cents by almost 86%. The outperformance came on the back of improved oil production.

However, the reported figure plunged by more than 55% from the year-earlier profit of 58 cents a share in the wake of lower average price realizations for natural gas (down 46.5% year over year).

Total revenue improved 29.8% to $3,539.0 million from $2,727.0 million a year ago. The top line also got the better of the Zacks Consensus Estimate of $1,532.0 million.

Full year 2012 adjusted earnings of 61 cents a share surpassed our expectation of 48 cents. The reported figure, however, fell 78.2% from the year-ago profit level of $2.80 per share.

Total revenue in 2012 was $12,316.0 million, representing an increase of 5.9% from the 2011 figure of $11,635.0 million and beating the Zacks Consensus Estimate of $5,745.0 million with ease.

Operational Performance

Chesapeake's average daily production in the quarter increased over 9% year over year to 3,931 million cubic feet equivalent (MMcfe), of which natural gas accounted for 77%. The percentage of natural gas production to total volume decreased 4% points on an annualized basis. However, natural gas production grew 2.9% to 280 billion cubic feet (Bcf) from 272 Bcf, while oil production expanded 68.9% from the year-ago level.

Full year 2012 total production grew 18.8% year over year to 3,886 MMcfe per day, comprising 80% of natural gas.

Natural gas equivalent realized price in the reported quarter was $4.23 per thousand cubic feet equivalent (Mcfe), down 16.7% from $5.08 in the year-earlier quarter. Average realizations for natural gas were $2.07 per Mcf compared with $3.87 per Mcf in the year-earlier quarter. Liquids were sold at $92.23 per barrel, up 4.8% from the year-ago price of $88.02 per barrel.

On the cost front, production expenses decreased 5.7% from the year-earlier level to 83 cents per Mcfe in the fourth quarter.

Financials

At the end of the quarter, Chesapeake − the largest U.S. natural gas producer after ExxonMobil Corporation (XOM) − had a cash balance of $287 million. The debt balance stood at $12,157 million, representing a debt-to-capitalization ratio of 40.5%. Operating cash flow decreased 60.3% year over year to $864.0 million.

Guidance

As the company shifts its focus to more liquid-rich plays, it expects its natural gas production to turn down approximately 7% in 2013, while liquids production is expected to increase approximately 27%.

Chesapeake expects 2013 total production in the band of 1,390–1,454 Bcfe. Natural gas is expected to contribute 1,030–1,070 Bcf to the total production. Oil production forecast is 36–38 million barrels/MMBbls and NGL will likely be in the 24–26 MMBbls range.

During 2013, it aims to spend approximately 86% of its total drilling and completion capex in liquids-rich plays. Chesapeake plans to invest heavily in the development of its holdings in the Eagle Ford Shale, Granite Wash and Mississippi Lime.

Reserves

At the end of 2012, Chesapeake had proved reserves of approximately 15.7 trillion cubic feet equivalent (Tcfe) – 57% proved developed – down 17% from year-end 2011.

Zacks Rank

Chesapeake retains a Zacks Rank #3 (short-term Hold rating). There are other stocks in the oil and gas industry like Range Resources Corporation (RRC) and Memorial Production Partners L.P. (MEMP) that appear more attractive. Both hold a Zacks Rank #2 (Buy).