Chesapeake’s Stock Tanks On Weak 2Q’16 Results; Outlook Appears Gloomy
Chesapeake Energy (NYSE:CHK), one of the largest natural gas producers in the US, posted depressed June quarter 2016 results this week, due to the ongoing commodity downturn [1]. Although the recovery in crude oil prices in the second quarter led to an improvement in the company’s price realizations, the lower than expected production more than offset the impact of better pricing and resulted in a sharp decline in the company’s revenue, both annually and sequentially. As a result, the oil and gas producer missed its consensus estimate for revenue and earnings by a huge margin. This caused its shares to tank to under $5 per share (almost 6% decline) during the day, before recovering to $5.13 per share, reducing the drop to half.
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On the cost side, the company managed to reduce its cash costs by 25%, which enabled it to perform significantly better on a year-on-year basis. However, its operating profit came in much lower than the previous quarter, largely on the back of lower revenues.
Yet, the major concern about Chesapeake continued to be its weak balance sheet. The company had net cash outflows from operations of $326 million for the first half of the year, as opposed to cash flows of $737 million in same period last year. Further, the company’s shareholder equity diminished drastically during the quarter, owing to a significant deficit on the company’s books. Besides, though the company’s reduced its long-term debt by roughly $830 million over the last three quarters, its huge debt obligations continue to weigh heavily on its deteriorating balance sheet.
That said, the E&P company is fighting tooth and nail to weather this down cycle with its four point strategy. (Read: What Is Chesapeake’s Strategy To Survive The Current Commodity Downturn?) Under the strategy, the company is trying to maximize its liquidity by reducing its costs and capital expenditure, optimize its portfolio by monetizing its assets, improving its cash flows, and strengthening its capital structure. The company made progress on this strategy in the last quarter by reducing its cash costs by 25%, completing assets sales worth $1 billion year-to-date, and reducing its long-term obligations. However, given that Chesapeake could not perform well in the second quarter, despite the steep recovery in commodity prices, we figure that the company is sailing against strong tides. Thus, the company’s fate is highly dependent on the speedy recovery of commodity markets.
Chesapeake’s Debt Schedule
Source: Chesapeake’s 2Q’16 Presentation
Have more questions about Chesapeake Energy (NYSE:CHK)? See the links below:
- Chesapeake’s 2Q’16 Earnings To Remain Weak Due To Depressed Commodity Prices
- What Is Chesapeake’s Strategy To Survive The Current Commodity Downturn? What Is Its Progress So Far?
- Ongoing Commodity Slump Pulls Down Chesapeake’s 1Q16 Earnings; Significant Asset Sales Likely To Improve Liquidity For 2016
- How Has Chesapeake’s Revenue And EBITDA Composition Changed Over The Last 5 Years?
- How Has Chesapeake’s Production Mix And Price Realization Changed Over The Last 5 Years?
- What Is Chesapeake Energy’s Revenue And EBITDA Breakdown?
- What Is Chesapeake Energy’s Fundamental Value Based On 2016 Estimated Numbers?
- How Will Chesapeake’s Revenue Move If Crude Oil Prices Rebound To $100 Per Barrel By 2018?
- How Will Chesapeake’s Revenue Move If Crude Oil Prices Average At $50 Per Barrel In 2018?
- How Much Value Will Chesapeake’s Crude Oil & NGLs Operations Add by 2020?
- How Much Value Will Chesapeake’s Natural Gas Operations Add by 2020?
- How Will Chesapeake’s Revenue And EBITDA Grow Over The Next 5 Years?
- Why Is OPEC An Important Determinant Of Crude Oil Prices?
- Why Is China A Key Factor In Determining Crude Oil Prices?
- How Are Crude Oil Prices And Global Oil Rig Count Correlated?
- How Are Natural Gas Prices And Global Gas Rig Count Correlated?
Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Chesapeake Energy
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Notes:- Chesapeake Announces Second Quarter 2016 Results, 4th August 2016, www.chk.com [↩]