Chesapeake Energy (NYSE:CHK) has had a fairly good 2013. The company’s margins have been on the uptrend lifted by both higher liquids production and lower per-unit production costs. The company’s financial position has also been improving as capital expenditures have been reined in. In this article, we take a brief look at what to expect from Chesapeake Energy going into 2014, highlighting some of the key factors that we will be tracking.
Trefis has a $25 price estimate for Chesapeake Energy,which is roughly 7% below the current market price.
Expect Operating Cash Flows To Fund Drilling Spending
- How Much Value Will Chesapeake’s Natural Gas Operations Add by 2020?
- How Much Value Will Chesapeake’s Crude Oil & NGLs Operations Add by 2020?
- What Is Chesapeake’s Revenue And EBITDA Breakdown?
- How Will Chesapeake’s Revenue And EBITDA Grow Over The Next 5 Years?
- By How Much Has Chesapeake’s Revenue And EBITDA Changed Over 2011-2015?
- How Has Chesapeake’s Production Mix Changed Over 2011-2015?
For much of the past decade, Chesapeake’s capital expenditures have exceeded operating cash flows, as it invested heavily in expanding its acreage and drilling program, running up a sizable debt load. However, the company has taken some significant strides in improving its capital efficiency this year and is progressing towards funding its drilling and completion capital expenditures entirely through its operating cash flows. For 2013, drilling and completion capex is estimated to come in at less than $5.8 billion while operating cash flows are estimated to be around $5.1 billion. This is a significant improvement over 2012 when the company’s capex was close to $9 billion while operating cash flows were just about $4 billion.  While the company has yet to provide its detailed 2014 guidance, we believe there is a strong possibility that it may be able to fund its drilling and completion spending through its operations, since it has been curtailing gas drilling and focusing on its most productive liquids assets while ramping up the efficiency of its drilling program.
Assets Sales Could Continue, Albeit On A Smaller Scale
While Chesapeake could possibly fund its drilling and completion spending through cash generated from operations going forward, it may still need to divest some assets to meet its debt payments as well as to fund its leaseholdings and other capex. As of Q3 2013, the company’s total long term debt stood at around $12.7 billion out of which around $1.7 billion is due in 2015.  Price realizations on asset sales will prove to be a key factor to watch, since the company had been selling some assets at below their fair value this year. For instance, in February, the company sold a 50% stake in its acreage in the Mississippi Lime formation to China’s Sinopec at prices that were around 60% lower that what it had valued them at previously. We believe that Chesapeake’s ability to divest assets at a fair price is likely to be an important factor to watch in the near term.
All Eyes On Oil Production Growth
Chesapeake’s liquids production growth has been the driving force behind the company’s improved financial performance over the last year. Oil production is up by nearly 38% year to date compared to last year, and liquids now account for more than 60% of the company’s production revenues. However, there is some concern as to whether the company will be able to sustain this growth since much of the production increase has come from aggressive drilling of the company’s most promising and lucrative acreage. The mix of conventional and shale oil wells will be a factor too, as shale oil wells typically start off strongly after which there is typically a relatively rapid decline when compared to conventional oil wells. ((Businessweek)) We will be closely watching the company’s production guidance, which is expected to be provided in early 2014.Notes: