Chesapeake’s 2Q’17 Earnings Surge; Reiterates Production And Capex Guidance For 2017

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Chesapeake Energy

As expected, Chesapeake Energy (NYSE:CHK), one of the largest natural gas producers in the US, posted a strong improvement in its June quarter earnings on 3rd August 2017((Chesapeake Energy Announces June Quarter 2017 Results, 3th August 2017, www.chk.com)). The company posted 2Q’17 earnings of 18 cents, as opposed to market expectations of 15 cents, which were driven by high price realization and its cost cutting measures during the quarter. However, it missed its revenue estimate by a small margin due to weak production volumes.

Going forward, the E&P company has upheld its capital spending and production targets for the full year 2017, in contrast to its peers, such as Anadarko Petroleum and ConocoPhillips, who have restricted their capital investment budget for the year in the wake of the uncertainty in commodity markets. While this move could work in the company’s favor if it manages to deliver on its production targets, it is likely to weigh down the company’s already dwindling cash flows, and may delay its plans to obtain cash flow neutrality.

See Our Complete Analysis For Chesapeake Energy Here

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Operational Highlights

  • Chesapeake witnessed a surge in the oil and gas price realizations during the June quarter, which augment its top-line growth for the quarter. However, the positive impact of higher commodity prices was partially offset by a 20% decline in the company’s production volumes (excluding the impact of asset sales). Yet, the US-based company managed to post 2Q’17 revenue of $2.28 billion, more than 40% higher compared to the same quarter of last year.

  • The oil and gas producer saw a drop of almost 45% in its operating costs during the quarter, largely driven by lower impairment charges, depreciation and amortization, and litigation charges. As a result, the company reported adjusted earnings of $146 million, or 18 cents per share in the current quarter, versus an adjusted loss of $115 million, or 16 cents per share in the year ago quarter.
  • Year-to-date, Chesapeake has sold or agreed to sell multiple additional producing properties and acreage for roughly $360 million. Of this, deals worth $265 million are expected to be closed by the end of the third quarter. The company does not have a full year target for its asset sale program, but will continue to explore attractive opportunities to divest its non-core and/or non-strategic assets that will enhance its portfolio returns and liquidity.

Going Forward

  • As mentioned earlier, Chesapeake has reiterated its production and capital spending guidance for the year. The company pointed out that it is on track to deliver oil growth of 10% in 2017, and is expected to exceed its previous goal of 100,000 barrels of oil per day before the end of the year. This growth trajectory will be driven by the company’s operations in the Eagle Ford, Utica, and Powder River Basin. Besides, the operational and capital efficiencies realized so far will enable the company to produce more with less rigs. As a result, the company will now deploy only 14 rigs during the year as opposed to its previous expectation of 18 rigs.
  • On the cost side, the US-based company estimates its combined production and general and administrative expenses per boe to continue to decline in the second half of 2017.
  • Despite the recent revisions in capital budgets by its peers, Chesapeake stuck to its capital spending target of $2.1-$2.5 billion in 2017. However, the company highlighted that it will actively manage its investment plan closely with an aim to achieve cash flow neutrality as soon as possible. Chesapeake expects that it can achieve free cash flow neutrality if oil prices stick around $50 per barrel and natural gas prices at $3 per Mcf in 2018, and will adjust its 2018 capital spending program and production growth based on the recovery of the commodity markets.
  • Lastly, reducing its long term debt to enhance its highly levered capital structure will continue to be Chesapeake’s top priority.

Chesapeake’s Latest Debt Schedule

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