Chesapeake’s Stock Down Since Mixed Q4 Earnings; Company To Adopt An Offensive Approach In 2017

Chesapeake Energy (NYSE:CHK), one of the largest natural gas producers in the US, posted a mixed set of December quarter and full year 2016 financial results last week, ^[1] despite the recovery in commodity prices in the last few months. As a consequence, the oil and gas company has witnessed a drop of more than 8% in its stock price since the announcement of its results. That said, the exploration and production (E&P) company remains confident of the progress it has made towards fighting the commodity slump, and considers 2017 to be an important year in its turnaround. The US-based company expects to pick up its production growth over the remaining years of this decade, while controlling its operating costs and optimizing its balance sheet.

Key Highlights of 4Q’16 Results

Given the weakness in commodity price, Chesapeake’s production for 2016, excluding the asset sales, came in almost 7% lower compared to 2015. Further, despite the sharp rebound in the oil and gas prices in the second half of 2016, the company’s average price realization was notable lower compared to the previous year. Thus, the oil and gas player saw a sizeable decline in its top-line versus the prior year, causing the company to miss the consensus expectations for the quarter as well as for the full year.

However, the independent producer made a strong dent in its cost structure during the year. Chesapeake managed to bring down its production costs by approximately 28% and gathering, processing, and transportation (GP&T) expenses by roughly 7% compared to 2015, resulting in annual savings of $600 million. As a result, the oil and gas major witnessed a drastic improvement in its profitability. The company reported a pre-tax loss of $4.5 billion in 2016 as opposed to a loss of $19.1 billion in the previous year.

Progress On Strategy

Apart from the significant reduction in the operating costs, Chesapeake eliminated annual costs of $200-$300 million by divesting its Barnett asset, resulting in higher EBITDA. Further, the company renegotiated some of its midstream contracts including new gathering agreements in the Powder River Basin and Mid-Continent assets to augment its liquidity going forward. Additionally, the oil and gas producer divested more than $2 billion of its non-core and/or non-strategic assets to optimize its existing portfolio. Due to its relentless efforts to strength its portfolio, Chesapeake currently has 11.3 billion barrels of net recoverable resources, and 5,600 locations that generate an internal rate of return of greater than 40%.

In terms of the financial position, Chesapeake refinanced its long term debt at attractive rates, and has reduced the debt maturities in 2017 and 2018 from $2.77 billion to only $77 million. Furthermore, the company aims to bring down its long term obligations by $2-$3 billion over the next few years through additional asset sales and higher cash flows. The oil and gas company targets to achieve cash flow neutrality in 2018, and a net debt-to-EBITDA multiple of 2 times by 2020.

Chesapeake’s Debt Schedule

Guidance For 2017 And Beyond

Despite the weakness in its profitability in 2016, Chesapeake plans to deal with the commodity downturn with an offensive approach in 2017. The company expects its total production to grow by 7% in 2017, with most of the growth kicking in post the second quarter. Further, the company believes its oil production will expand by roughly 10% during the year, with Eagle Ford, the Mid-Continent, and the Powder River Basin driving the growth. Moreover, Haynesville and Marcellus will play a crucial role in the expansion of the company’s gas production. Besides this, Chesapeake anticipates its oil growth to accelerate further in 2018, and increase by more than 20% between the fourth quarter of 2017 and the fourth quarter of 2018. Thus, overall, the company estimates its production to rise in the range of 5% to 15% annually through 2020, assuming a price of $3 per mcf of natural gas and $60 per barrel of oil.

In addition to this, Chesapeake increased its capital spending budget for 2017 in comparison to the previous year. As opposed to restricting capital expenditure in 2016 due to depressed oil and gas prices, the company has allocated around $2.2 billion (mid-point) for its capital spending needs for 2017. This is almost 30% higher compared to what the company spent in 2016, and indicates that the E&P company expects the commodity markets to revive in the forthcoming quarters.

Lastly, Chesapeake has recently reinstated the payment of dividends on its outstanding convertible preferred stock((Chesapeake Reinstates Quarterly Dividend For Preferred Stocks, 20th January 2017, www.chk.com)). In fact, the oil and gas producer has also announced the payment of dividends in arrears to the preferred shareholders, reinforcing investor confidence in the company and its future.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Chesapeake Energy Announces December Quarter 2016 Results, 23rd February 2017, www.chk.com [↩]