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Energy Stock Earnings Preview: CHK, ETP and APC

A slew of major energy companies – including heavyweights, Chesapeake Corp. (NYSE: CHK), Anadarko Petroleum (NYSE: APC) and Energy Transfer Partners (NYSE: ETP) – are set to report third-quarter earnings today.

This is important, because each company represents a different niche of the energy market: Chesapeake is the second-largest natural gas producer in the United States. Anadarko is a major producer of both oil and gas. And ETP is a dominant MLP with a huge portfolio of pipelines.

So here’s a quick look at what to expect from each, and what their results will say about the energy market as a whole.

Turning Tides for Chesapeake?

Chesapeake has as much riding on its third-quarter results as any company out there.

This has already been a tumultuous year for the company, with natural gas prices dropping to a historic low of $1.90 per mcf in April. Not to mention a storm of controversy arising from questionable management decisions.

These developments drove Chesapeake shares from about $30 a share a year ago to $13.50 in May. They bounced back up to about $20 in August, and have hovered around there ever since.

Now, the company’s third-quarter earnings will be highly scrutinized, as many traders piled into the stock earlier this year, betting on a successful turnaround.

Indeed, this earnings report will serve as a barometer of how that turnaround is evolving.

In the second quarter, revenue topped expectations, but earnings fell short. However, this time around we might see a surprise to the upside on both counts.

Natural gas prices have clawed their way back to $3.50 per mcf – well above Chesapeake’s breakeven point of $2.70. And the company hedged its liquids production at $101.34 per barrel, giving it a strong base for high oil production earnings.

Additionally, Chesapeake has made progress in reducing its giant debt burden. The company recently sold off $7 billion of shale assets to Royal Dutch Shell (NYSE: RDS.A, RDS.B) and Chevron (NYSE: CVX).

Chesapeake plans to use the immediate cash proceeds from the deal – about $2.8 billion – to pay down a $4 billion bridge loan it took out in May. That loan was a lifeline for Chesapeake, which at the time was faced with a $10 billion funding shortfall.

It’s now sold $11.7 billion in assets this year, and plans another $4.25 billion to $5 billion in asset sales in 2013. That will further reduce the company’s debt and help close its budget gap.

The average analyst estimate for Chesapeake’s earnings is $0.10 a share for the third quarter. But the company could do far better than that. With things starting to come together for the company, we could see a much bigger score of around $0.15 a share.

Now, on to another exploration and production company – Anadarko Petroleum.

Analysts Behind Anadarko

Analysts are very optimistic about Anadarko’s third-quarter results, with 84% of those that cover the stock rating it as a “Buy.”

They’re right to be bullish: Anadarko has tremendous prospects both onshore and off.

The company is among the largest independent leaseholders and producers in the deepwater Gulf of Mexico, with more than two million net acres. And in the continental United States, Anadarko has a strong presence in the Eagle Ford, Marcellus and Wattenberg shale plays.

Abroad, Anadarko recently relinquished its stake in the Espirito Santo Basin off the coast of Brazil to focus more attention on the more productive Campos Basin. Six of the known fields in the Campos Basin together account for more than half of Brazil’s total crude production, making it the most active play in Brazil’s deepwater.

With production soaring, the company sold a record 742,000 barrels of oil a day in the second quarter – 20,000 more than in the first quarter. However, the company did see a year-over-year drop in revenue, which broke a three-quarter streak of consecutive increases.

I expect that Anadarko has gotten back on track in the third quarter, though. We should see it book a profit of at least $0.75 a share, up from $0.65 a year ago, with revenue climbing from $3.38 billion to $3.4 billion.

ETP’s Profit Pipeline

Finally, there’s Energy Transfer Partners, which just finalized its $5 billion buyout of Sunoco.

The deal brings with it 4,900 Sunoco gas stations and 8,000 miles of pipeline. This transforms ETP from a regional natural gas pipeline operator to a national point man for crude and petrochemicals, as well as natural gas.

Now that the acquisition is complete, 70% of ETP’s cash flow will come from transporting gas and 30% from more profitable liquids. It’s also expected to bring $70 million in annual cost savings.

None of that will be reflected in today’s results, but there’s still cause for optimism. Analysts expect the company to report earnings per share of $0.30. That would be a boon for a company that registered a $0.01 profit in the second quarter and a $0.19 loss in the year-ago period.

Revenue should come in at about $1.79 billion, up from $1.72 billion last year.

These earnings should hold up, as ETP is in a particularly advantageous position. That is, as a pipeline operator, the company’s paid by volume. So it’s not affected by the price of oil and gas, as long as demand is strong. And right now, demand is exceptional.

In fact, ETP’s biggest presence is in Texas, where production numbers are hitting highs not seen since the early 1990s. And the Sunoco acquisition gives it a presence in the Northeast, where hundreds of wells are waiting for pipeline capacity before they can be brought online.

So, regardless of what happens in the short term, ETP has set itself up nicely for the years ahead.

In fact, all three of these companies have strong long-term prospects. Anadarko and ETP are strong buys – no question.

Only Chesapeake is something of a question mark, given its suspect balance sheet, vulnerability to gas prices and unreliable management. Still, its assets are top notch, so it remains an enticing turnaround play.


Jason Simpkins

Jason Simpkins

, Energy Editor

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