Chesapeake Energy Corporation (CHK) has modestly raised its 2009 and 2010 production outlook and introduced its 2011 production guidance. The company also expects to spend $3.15 billion to $3.35 billion on drilling this year, up from its August forecast of $3 billion to $3.2 billion. 

The company is expecting production of 12 million barrels of oil (MMbbl), 815–825 billion cubic feet (Bcf) of natural gas and total production of 885–895 billion cubic feet equivalent (Bcfe) during 2009. 

For 2010, Chesapeake expects oil production to be 12.5 MMbbl, natural gas generation of 882–902 Bcf and total output to be 957–977 Bcfe. The company has provided its initial projections for 2011. It expects 13 MMbbl of oil, 1,007–1,027 Bcf of natural gas and 1,085–1,105 Bcfe of total production. 

For 2009, the company expects year over year production growth to be in the range of 5%–6% (up from previous guidance of 4%–5%), while for 2010 it is 8%–10% (up from 7%–8%). In its first forecast for 2011, the company said production would rise 12%–14% over 2010. 

Chesapeake expects cash inflows of $5.30 billion to $5.60 billion this year, down from $5.80 billion to $6.20 billion predicted in August. However, cash inflows for 2010 are expected to be in the range of $5.75 billion to $6.90 billion, up from the previous guidance of $5.00 billion to $6.15 billion. 

We believe that production growth will remain at or near the top of its large-cap peer group, particularly in the light of continued strong drilling results from its shale plays. With a significant amount of 2009 and 2010 volumes hedged at fairly attractive prices, Chesapeake remains better positioned than most of its peers to operate in the tentative commodity-price environment. 

However, the company’s natural gas weighted reserves and production remain our concern. Moreover, while we believe there is an improvement in commodity prices in the short to medium term, the company’s strong hedge position may limit the benefit of higher prices. As such, we maintain our Neutral recommendation for the stock.
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