Chesapeake Posts Weak 3Q’17 Performance; Plans To Restrict Capex In 2018

Unlike most of its peers, Chesapeake Energy (NYSE:CHK), one of the largest natural gas producers in the US, posted a weaker-than-expected financial performance for the September quarter, missing the consensus estimate for the top-line. The US-based company witnessed a drop in its overall production due to its asset sales and operational shutdowns by hurricanes during the quarter, which impacted its revenues as well as earnings for the quarter. Going forward, the company aims to restrict its capital spending budget for 2018 while maintaining a flat to moderate production growth. Also, the company will continue to focus on optimizing its highly levered balance sheet and achieve cash flow neutrality over the next couple of years. We have a price estimate of $5 per share for Chesapeake Energy, which is in line with its market price.

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Below are the key takeaways from Chesapeake’s 3Q’17 earnings report using our interactive platform:

Owing to the asset sales made by the company, along with the closure of Eagle Ford operations due to Hurricane Harvey, Chesapeake experienced a drop in its overall production on a year-on-year basis. This, coupled with the continued weakness in commodity prices, led to a sharp decline in the company’s 3Q’17 revenues both sequentially as well as annually. Further, the company’s combined production and G&A expenses rose almost 6% during the quarter, which further pulled down its bottom line.

Despite the weak 3Q’17 performance, Chesapeake expects to meet its production targets for the year and aims to achieve an average oil output of 100,000 barrels by the end of the year. However, Chesapeake plans to focus on value over volumes in the next few years. For this, the company aims to restrict its 2018 capital spending budget (details will be released in February 2018), while maintaining a flat to moderate production growth. However, the final capital investment and production will be dependent on the pace of recovery in the commodity markets.

Guidance For 2017 And Beyond

Apart from improving its operational performance, enhancing the capital structure will be a key priority for Chesapeake in the next two to three years. The company will remain focused at reducing its long term debt by $2-$3 billion over the next couple of years in order to improve its highly levered balance sheet. However, given the weak cash flow position, the company plans to further divest some of its non-core assets, particularly in the Mid-Continent, in order to fund the repayment of its debt obligations. In addition, Chesapeake expects to achieve cash flow neutrality over the next two years, backed by its quality assets and capital efficiency. However, we believe that the company will need to restrict its capital spend and enhance its debt profile to be able to achieve this objective.

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