How Has Chesapeake Progressed In Its Strategy To Weather The Downturn?

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Chesapeake Energy

Over the last two years, the downturn in the commodity markets has pulled down the valuation of oil and gas companies globally, haunting investors about their investment in these companies. Such is the case with Chesapeake Energy (NYSE:CHK), which was trading at over $30 per share in June 2014 when the oil slump began. Since then, the oil and gas producer has witnessed a severe decline in its revenue and profitability, which caused its stock price to plunge and touch its all-time low of $1.50 per share in February of this year. In fact, the company was believed to be on the verge of filing for bankruptcy due to its inability to repay its huge long-term obligations.

However, the management has taken requisite measures to improve its perception and to pacify the market and its investors. As a result, the second largest natural gas producer developed a four point strategy to weather the current down cycle. The strategy broadly entails the following:

  • Maximizing liquidity – In order to preserve its depleting cash flows, Chesapeake aims to reduce its capital budget by more than 50% for this year. For the full year 2016, the company expects to spend $1.26-$1.76 billion on its exploration and drilling activities. Further, the company expects to reduce its lease operating expense (LOE) and general and administrative (G&A) expense by 10% and 15% respectively during the year to sustain its operating margins. In the June quarter, Chesapeake managed to reduce its cash costs by 25% on a year-on-year basis and is on track to achieve its target for the year.
  • Optimizing portfolio – Given the scarcity of cash to finance its capital spending program, Chesapeake has been resorting to asset divestitures. At the end of the first half of 2016, the company had completed asset sales of $1 billion and is expected to generate more than $2 billion in asset divestitures by the end of the year, which is higher than its previous target of $1.2-$1.7 billion. The company has also acquired ~70,000 net acres in the Haynesville play.
  • Increasing cash flows – In order to improve its EBITDA, and, in turn, the cash flows, Chesapeake is consistently negotiating better terms for its gathering and transportation agreements. In the second quarter of 2016, Chesapeake renegotiated Mid-Continent gathering agreements, resulting in a 36% reduction in its gathering costs. These renegotiations are likely to lead to an EBITDA uplift of $200 and $300 million in 2016 and 2017, respectively.
  • Improving Capital Structure – The oil boom had resulted in a huge debt on Chesapeake’s balance sheet. However, in order to save itself from bankruptcy, the company has been actively refinancing its debt due within the next two years at lower rates.  Overall, the company has reduced debt obligations of ~$830 million since September 2015, which is likely to provide incremental liquidity of roughly $730 million. Further, the company has secured a term loan of $1.5 billion and has managed to negotiate favorable covenants such as interest coverage ratio and leverage ratio through 2017.

Below we provide a snapshot of Chesapeake’s strategy and its progress so far:

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  6. Key Takeaways From Chesapeake’s Q1

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Have more questions about Chesapeake Energy (NYSE:CHK)? See the links below:

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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