Hurricane Harvey Could Be Another Reason For Chesapeake’s Downfall

Despite posting a strong improvement in its performance last month, Chesapeake Energy‘s (NYSE:CHK) stock has plunged about 15% since the announcement of the second quarter results. This has been caused largely due to the fluctuations in the commodity prices over the last one month, coupled with the recent production disruptions by the Hurricane Harvey. The hurricane that hit the Gulf Coast of the US a fortnight ago had forced Chesapeake to curtail its drilling and exploration activities in the Eagle Ford basin, one of the company’s key operating basins, due to heavy rains and floods. Consequently, the company’s stock tanked to its 52-weeks low of $3.55 per share, more than 50% lower compared to the last year. Here’s our take on how Hurricane Harvey will impact Chesapeake and its value going forward.

See Our Complete Analysis For Chesapeake Energy Here

Source: Google Finance

Eagle Ford Was Expected To Drive 2017 Production Growth

During the June quarter earnings, Chesapeake had reiterated its production growth and capital expenditure targets, contrary to its peers, Anadarko Petroleum and ConocoPhillips, who had restricted their capital investment budget for the year in the wake of the uncertainty in commodity markets. The company aimed to increase its oil volumes to 100,000 barrels per day (bpd) by the end of 2017 with a capital spend of $2.1-$2.5 billion. However, in the first half of the year, the oil and gas company’s production averaged at around 528,000 boe per day, which is much lower than the midpoint of the company’s guidance of 551,500 boe per day. Thus, in order to meet its guidance, the company would have to grow its total output by 9%-10% in the second half of the year.

Chesapeake’s Eagle Ford Operations

Source: Barclays CEO Energy-Power Conference, September 2017

For this, the majority of the growth was expected to be driven by its operations in the Eagle Ford, Utica, and Powder River Basin. In fact, Eagle Ford was considered to be the most crucial basin, as the company was eyeing a 10% oil production growth from the region during the year. Accordingly, the company had completed 61 wells in the Eagle Ford basin in 1H17, and wanted to increase this number to 100 wells in 2H17. However, the US-based company was forced to shut its drilling operations in the area due to the heavy rains and storm over the last two weeks. Further, the closure of several refineries in Houston and the Gulf Coast area is likely to further weigh on the company’s production volumes.

Since the basin accounts for almost one-fifth of the company’s total oil production, the shutdown of production activities in the region will not only result in the failure to achieve the company’s production targets, but will also weigh negatively on its third quarter earnings. The longer the disruption continues, the more severe will be the impact on Chesapeake’s production volumes and earnings.

Given Chesapeake’s weak financial position and declining stock price, any unexpected incident, such as the Hurricane Harvey, has the ability to uproot the company’s fundamentals and take it closer to bankruptcy. Hence, we will be closely watching the impact of the natural calamity on the company and its third quarter results next month.

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