Chesapeake’s 1Q’17 Earnings Rise Sharply Backed By Improved Commodity Prices And Effective Cost Reduction Measures
In line with the market estimate, Chesapeake Energy (NYSE:CHK), posted a stellar quarter by reporting a drastic improvement in its March quarter revenue as well as earnings, on 4th May 2017((Chesapeake Energy Announces March Quarter 2017 Results, 4th May 2017, www.chk.com)), backed by the recovery in commodity prices during the quarter. The second largest natural gas producer in the US recorded an adjusted profit of $0.23 per share as opposed to the analyst expectation of $0.19 per share for the quarter, taking the investors by surprise. However, despite this, the company’s stock plunged close to 7.5% post the earnings release because of the sudden drop in oil prices on the back of rising US oil production. That said, the E&P company remains optimistic about the recovery of the commodity markets and has revised its production and capital spending targets for the year.
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Key Trends Witnessed In 1Q’17 Results
As the commodity prices bounced back in the last few months, Chesapeake witnessed a surge in the oil and gas price realizations during the March quarter. This rise in price realizations provided a boost to the company’s top line. However, the US-based company’s overall production came in at 48 million barrels of oil equivalent (MMBOE), more than 20% lower compared to the same quarter of last year. This partially offset the impact of improving commodity prices, and pulled down the company’s revenue for the quarter. That said, on a daily basis, Chesapeake’s overall production for the quarter averaged at 528 kboe per day, exceeding the midpoint of its guidance of 515-535 kboe per day. Further, the company’s oil production was 83,700 barrels per day, above the midpoint of guidance of 80,000 to 85,000 barrels per day. As a result, the company posted 1Q’17 revenue of $2.75 billion, versus the market forecast of $2.32 billion.
On the cost front, Chesapeake managed to bring down its overall operating expenses by almost 18% to $2.5 billion, from $3.1 billion in the year ago quarter. This enabled the company to generate a net profit (GAAP) of $140 million, compared to a loss of almost $1.1 billion in the same quarter of last year, marking a stark improvement in the company’s profitability.
In terms of financial position, Chesapeake’s cash at hand at the end of the quarter declined sharply to $250 million, from $880 million in 1Q’16. However, the company reduced its long term debt from $9.9 billion to $9.5 billion, which is likely to benefit the company in the long term. Furthermore, the company generated positive cash flows from its operations, which indicates that the company’s strategy to weather the commodity downturn is bearing fruit. Also, the oil and gas company divested some of its assets for $890 million during the quarter, which it utilized to finance its capital needs.
Going Forward
Despite the volatility in the global markets, Chesapeake remains positive about the rebound in commodity prices. Consequently, the company raised the lower range of its production guidance for the year (see table below), with a majority of the production picking up in the second half of 2017. Also, given the successful results of its development work in the Eagle Ford, Powder River Basin, and Mid-Continent basin, the company aims to achieve its oil production target of 100,000 barrels of oil per day by the end of the year.
In order to achieve its production target, Chesapeake has also revised the lower range of its capital expenditure from $1.9 billion to $2.1 billion. While an aggressive production and capital spending budget can prove to be a boon in a strong pricing environment, it can weigh heavily on the company’s cash flows and profitability in the current weak price environment. That said, the company will continue to focus on optimizing its balance sheet and cost structure, while improving the capital efficiency of its operations. However, the company’s future value will be highly dependent on the recovery of the commodity prices.
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