Chesapeake Set To Post A Stellar Quarter Backed By Higher Commodity Prices And Cost Savings
Chesapeake Energy (NYSE:CHK), the second largest natural gas producer in the US, is likely to post a stark improvement in its March quarter financial results on 4th May 2017((Chesapeake Energy Announces March Quarter 2017 Results, 18th April 2017, www.chk.com)), backed by the recovery in commodity prices during the quarter. In addition, the oil and gas company’s audacious measures to control its operating costs and optimize its capital structure are likely to result in a solid jump in its profitability for the quarter. Despite the stock plunging almost 25% since the beginning of the year, the US-based company plans to adopt an offensive approach to deal with the current downturn, and expects to grow its total production by 7% in 2017.
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Key Trends Witnessed In 1Q’17
With the production cuts implemented by the Organization of Petroleum Exporting Countries (OPEC) in the first quarter, crude oil prices rose sharply, and averaged at around $52 per barrel during the quarter, as opposed to an average of only $33 per barrel in the same quarter of last year. Further, the Henry Hub gas prices increased from $1.99 per MMBTU in 1Q’16 to over $3.02 per MMBTU in the latest quarter. This rebound in oil and gas prices is expected to result in an improvement in Chesapeake’s price realizations, boosting the company’s top-line growth for the quarter.
Data Source: US Energy Information Administration (EIA)
Further, the company’s consistent efforts to reduce its operating costs are likely to boost its bottom line. Moreover, Chesapeake has renegotiated some of its midstream contracts in the Haynesville and Eagle Ford plays, which will enable the company to bring down its midstream and marketing commitments by $7 billion compared to 2014, and enhance its liquidity.
On the financial side, Chesapeake has managed to refinanced its long term debt at attractive rates, and has reduced the debt maturities in 2017 and 2018 from $2.77 billion to only $70 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
Source: Goldman Sachs Houston Credit Investor Tour
Also, Chesapeake has increased its capital spending budget for 2017 in comparison to the previous year, as it expects the commodity markets to revive in the forthcoming quarters. The company plans to spend around $2.2 billion (mid-point) on its capital needs in 2017, almost 30% higher compared to what the company spent in 2016, in order to meet its expansion targets for the year. A portion of this capital will be spent on the Eagle Ford, the Mid-Continent, and the Powder River Basin, that will augment the company’s oil growth, while the remaining amount will be allocated to Haynesville and Marcellus, that will play a crucial role in the expansion of the company’s gas production. That said, a higher capital expenditure in a weak pricing environment could weigh on the company’s cash flows and liquidity.
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