Chesapeake: Time to Consider an Investment

Similar to many other companies in the oil & gas sector, Chesapeake Energy Corporation (CHK) suffered greatly during 2015 with the drop in the crude oil and natural gas prices. Its shares lost more than 77% of their value in the past twelve months ended December 31, 2015. Moreover, this carnage of losing value for its shares continued even in 2016, with the share price waning to as low as $1.59 a share on February 12.

More importantly, this sustained low oil and natural gas prices hurt its fourth-quarterly as well as the full year results for 2015.
The second-largest producers of natural gas for the fourth- quarter reported a loss of $0.16 per share, higher than net loss of $0.11 per share in the fourth-quarter of 2014. In fact, for the full year its loss came in at $0.20 per share as compared to net earnings of $1.49 per share a year earlier.

However, the company initiated a handful of other affirmative steps such as suspension of preferred dividend, optimization of its base production and hedged sizeable its oil and gas volume at an attractive price in 2016. These positive moves should possibly allow Chesapeake to stay alive during this downturn in the oil and gas market. Let us look at these initiatives in details.

Reduction in net debt and operating expenses

Although, Chesapeake Energy had realized significant decline in its financials, the company appreciably lowered its net debt position by way of selling its non-core assets. As a result, its net debt at the end of fiscal year 2015 came in at $9.7 billion, down approximately 18% from its net debt position of $11.8 billion in 2014.

The important thing is that the company is making significant progress with the asset sales this year. For instance, Chesapeake has closed about $700 million of divestitures under its purchase and sale agreement this year so far. This extensively exceeds its earlier forecasted divestitures of $200 to $300 million in the first-quarter of 2016. Moreover, Chesapeake is lining up additional $500 million to $1.0 billion of asset sale during the course of 2016. Therefore, these divestitures steps should enable the company to lower its cash interest expenses and improve its debt position in 2016.

Positives to consider

Chesapeake in view of low oil and gas prices has cut its preferred dividend. The company last month announced that it would suspend payments of dividend for its preferred stock instantly. Its Chief Executive Officer Doug Lawler said, “The board and management believe this decision is in the best long-term interest of all Company stakeholders. Today's decision to suspend our preferred stock dividends will allow the company to retain approximately $170 million of additional cash per year and use these funds to purchase debt at significant discounts in the near term”.

In addition, Chesapeake has meaningfully lowered its capital expenditure for 2016. The company now expects its capital expenditure to range between $1.3 billion and $1.8 billion, down nearly 57% from 2015 levels. The very important aspect of this capital plan is that the company plans to use more of this capital to its core assets that have shorter cash cycle. This is due to the fact that these core assets have positive rate of returns at the current commodity price environment and should help the company to offset the decline in production from its non-core asset sales.

Strong hedging position to protect its cash flows in 2016

In a lower realized oil and natural gas prices, Chesapeake is strategically enhancing its cash flows through strong hedging positions. For instance, the company realized approximately $1.3 billion of revenue through realized hedging gains in 2015. This compares to realize hedging losses of approximately $375 million for the 2014 full year.

Looking ahead, the company has hedged approximately 56% of its projected 2016 oil production at an average price of $47.79 per bbl and nearly 58% of the company's projected 2016 natural gas production at an average price of $2.84 per mcf. This should help the company to mitigate a portion of its exposure to adverse changes in the prevailing market prices. The chart below illustrates its hedging position in 2016.


Chesapeake Energy is making significant progress on the operational side. Chesapeake has optimized production base across its asset portfolio and consistently increasing efficiencies at these assets. Also, it is expected to significantly reduce its production, G&A and gathering & transportation costs this year that should positively impact its EBITDA this year and improve its cash flow from operation. Additionally, Chesapeake should benefit from the strong hedging portion of its volume at attractive prices. So, Chesapeake though struggles at present but makes a good choice for investment upon the uptick in the oil price due to these operational improvements.
Published on Mar 22, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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