Chesapeake’s 3Q’17 Earnings To Suffer Due To Its Exposure To The Eagle Ford Basin

Chesapeake Energy (NYSE:CHK), one of the largest natural gas producers in the US, is set to post a weak set of financial numbers for the September quarter before the market opens on 2nd November 2017((Chesapeake Energy To Announce September Quarter 2017 Results, 20th October 2017, www.chk.com)). The drop in the company’s top-line as well as bottom-line will be largely driven by the disruption caused by Hurricane Harvey during the quarter. However, according to the company’s latest investor presentation, it plans to deliver on its production targets for the year, close asset sales of $2-$3 billion in the second half of 2017 or early 2018, and continue to focus on its cash flow neutrality target.

We have a price estimate of $5 per share for Chesapeake Energy, which is in line with its market price. However, we will revise our model shortly, based on the company’s third quarter earnings and guidance.

See Our Complete Analysis For Chesapeake Energy Here

• Much like its rivals, Chesapeake had to curtail its drilling and production in the Eagle Ford region due to the heavy rains and floods caused by the Hurricane Harvey in early September. But unlike its competitors, the company was eyeing a 10% oil production growth from the region that accounts for almost one-fifth of the company’s total oil production. The company had already completed 61 wells in the first half of the year, and wanted to increase this number to 100 wells in the remaining half. The shutdown of operations 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.
• Further, commodity prices remained volatile in the last three months due to the impact of various hurricanes and storms along the US coastline. Despite this, the WTI crude oil prices averaged at $48.18 per barrel for the September quarter, almost similar to the previous quarter. With no improvement in commodity prices and lower production, we expect the company’s revenue to remain depressed compared to the previous quarter.

• 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. 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 its already dwindling cash flows, and may delay its plans to obtain cash flow neutrality.
• 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.

Chesapeake’s Latest Debt Schedule

View Interactive Institutional Research (Powered by Trefis):

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

More Trefis Research