There Is Still Light At The End Of The Tunnel For Chesapeake Energy
As against market expectations, Chesapeake Energy (NYSE:CHK), one of the largest natural gas producers in the US, reported solid September quarter performance on the back of its focused efforts to weather the commodity downturn and a strong recovery in natural gas prices during the quarter. The company’s continuous initiatives to improve its cost as well as capital structure enabled it to post an adjusted profit of 9 cents in the quarter, as opposed to analyst expectations of a loss of 3 cents. Thus, the oil and gas company’s stock has gone up by almost 40% since its third quarter results were released in early November. In accordance with Chesapeake’s current performance, latest guidance, and market trends, we have revised the company’s price estimate to $8 per share. Below, we discuss the major drivers of this price revision.
Higher Production Growth Target
In order to sustain its future growth, Chesapeake has resorted to asset sales to finance its capital spending needs. So far, the company 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. Taking into consideration these divestments, the company expects its oil production to grow around 10% over the next one year and 20% in the subsequent year. It anticipates its overall production (adjusted for asset sales) to increase roughly 7% in the next four quarters and 10%-15% in the following four quarters. A majority of this growth will be driven by Chesapeake’s Eagle Ford and Mid-Continent assets, while the Powder River Basin will gradually contribute to some of this expansion.
Chesapeake Energy’s Production Guidance
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Higher Operational Efficiency And Liquidity
Due to its depleting cash flows, Chesapeake has been working towards reducing its operating costs by bringing about cost efficiencies in order to preserve its margins in the current down cycle. Year-to-date, the company has managed to cut its lease operating expense (LOE) by over 30%, much above its target of 10%-15% for the full year. These cost savings enabled the oil and gas company to post better-than-expected results in the latest quarter, reiterating investor confidence in the company’s ability to deliver on its targets.
In addition to this, Chesapeake has planned to curtail its capital spending between $1.4 and $1.5 billion, with an aim to conserve its liquidity. So far in the year, the company had restricted its capital spending by more than 50% compared to the last year. Thus, lower capital spending will enable the company to manage its liquidity better and invest in higher return projects in the future.
Optimizing Capital Structure
Furthermore, Chesapeake has made significant headway in improving its capital structure during the quarter. The second largest natural gas producer 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.
Chesapeake’s Debt Schedule (Post Reduction)
Thus, we believe that while there is a long way to go for Chesapeake, before it regains its valuation before the commodity trough, it has made strong progress in winning the confidence of investors with its consistent efforts and strong planning.
Have more questions about Chesapeake Energy (NYSE:CHK)? See the links below:
- Cost Reduction Measures And Recovery In Gas Prices Boost Chesapeake’s 3Q’16 Earnings
- 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?
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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