Chesapeake Energy: Trying to Stage a Turnaround

Chesapeake Energy (CHK) is capable of staging a comeback as the company’s financials have recently improved on a sequential basis. In the second quarter, Chesapeake had posted total revenue of $3.03 billion, up 10% sequentially.

The company reported a sequential improvement in its top line due to higher volumes due to increasing demand for natural gas. But, will Chesapeake be able to sustain this momentum in the long run?

Trying to maintain a strong balance sheet

Chesapeake is trying to maintain a strong balance sheet, so it is working proactively to enhance liquidity.
Chesapeake is sustaining superior capital discipline in weak-price environment and thus the company targeting fiscal year 2015 ending cash balance of approximately $1.5 billion and $4.0 billion of undrawn credit facility. However, in spite of $500 million of curtailment in capital expenditures and present reduction of nearly 55,000 boe/d of production, the company is estimated to exceed initial production forecast by about 5%.

Moving ahead, Chesapeake is improving net margins by reducing G&A and LOE expenses and undertaking several key efforts to enhance total revenue while restructuring gathering contracts, curtailing obligations and managing commitments.

Chesapeake will also see benefits from its gathering contracts with the Williams Companies in its dry gas Utica Shale operating region and its Haynesville Shale operating region  including, alignment of planned interests for both companies, complete removal of Haynesville MVC deficit payments as production levels for 2015 are estimated to meet the company expectations. This will improve the NAV and economics of dry gas Utica and Haynesville assets with both of them having moved to fixed fee contracts by reducing gathering fees and enhancing capital efficiency.

The energy company is expected to continue to optimize its daily operations by improving high-quality production while controlling non-core expenditures in order to sustain profitable energy productions at most of its key wells.

A closer look at asset performance                                          

Chesapeake is focused on enhancing margins with continued robust performance from widened lateral tests and 56% reduction in year-over-year operating expenditures. The company is currently producing 7,500 feet Nguyen wells with approximately 10,000 feet of first lateral well in progress along with the continuing drilling operations at nearly 7,500 feet to 8,500 feet laterals.

Chesapeake is uniquely deriving value creation from both the key Haynesville Shale and Utica Shale by enhancing high-quality production, increasing the lengths of key laterals while controlling non-core expenditures to drive improved year-over-year profitability.

The company is also seeing value generation at Eagle Ford by scaling its activities to commodity pricing and significantly improving its cost structure while focusing on increasing laterals to deliver enhanced capital efficiency and cut break-even expenses. Therefore, Chesapeake has successfully achieved 20% year-over-year reduction in D&C capital cost per lateral foot.


Hence, the above points indicate that there is a good chance that Chesapeake will be able to continue improving its financials going forward. So, it makes sense to consider purchasing some shares as it can do better in the long run.
Published on Oct 15, 2015
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

Posted in ...