Cost Reduction Measures And Recovery In Gas Prices Boost Chesapeake’s 3Q’16 Earnings
As expected, Chesapeake Energy (NYSE:CHK), one of the largest natural gas producers in the US, reported solid improvement in its September quarter results on 3rd November 2016 on the back of the recovery in gas prices in the last three months. Further, as opposed to analyst expectations of a loss of 3 cents, the company posted an adjusted profit of 9 cents in the quarter, largely due to the company’s efforts to improve its cost as well as capital structure. This positive earnings surprise was well received by investors, causing the company’s stock to jump by 8.5% soon after the market opened.
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Driven by the recovery in the natural gas prices over the last three months, Chesapeake’s third quarter revenue grew from $1.1 billion in the second quarter to $2.3 billion in the latest quarter. However, compared to the same quarter of last year, the revenue remain lower because of weakness in commodity prices. On the cost front, the US-based company reduced its cash costs by almost 20% in the third quarter, which resulted in an improvement in its operating income. For the quarter, Chesapeake reported an operating loss of $1.2 billion, as against a loss of $1.75 billion in the previous quarter, and $5.4 billion in the same quarter of last year. Based on the headway made by the company in reducing its costs, we expect the operating costs to reduce further in the coming quarter, resulting in further improvement in its operating income and margin.
The oil and gas producer has raised its production guidance for the full year 2016. The company anticipates a 10% growth in its oil production over the next four quarters and 20% growth between the fourth quarter of 2017 and 2018. In terms of asset sales, Chesapeake has closed divestments worth $1.3 billion in the first nine months of the year, and expects to complete sales of more than $2 billion by the end of the year.
Chesapeake Energy’s Production Guidance
On the liquidity front, Chesapeake has cut its capital budget by more than 50% for this year in order to preserve its depleting cash flows. Consequently, the company expects to spend $1.26-$1.76 billion on its exploration and drilling activities for the full year 2016. So far in the year, the company had restricted its capital spending by more than 50% compared to the last year.
Furthermore, the second largest natural gas producer made significant headway in improving its capital structure during the quarter. In this quest, Chesapeake issued new unsecured convertible notes of $1.25 billion, with a provisional call feature that will allow the company to convert the debt into equity within three years, subject to certain conditions. Moreover, the company reduced $1.2 billion of its preferred stock at a discount of over 40% in October. The two transactions will together result in additional liquidity and less preferred equity for Chesapeake, which will be immediately accretive to its capital structure.
Have more questions about Chesapeake Energy (NYSE:CHK)? See the links below:
- Chesapeake Energy’s 3Q’16 Earnings To Improve Due To Recovery In Commodity Prices
- How Has Chesapeake Progressed In Its Strategy To Weather The Downturn?
- Chesapeake’s Stock Tanks On Weak 2Q’16 Results; Outlook Appears Gloomy
- 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 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?
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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