Chesapeake Energy Is Now a Buy

Chesapeake Energy (CHK) announced first quarter ended March, 31 2016 total revenue of $1.95 billion, down 39 percent year-over-year from $3.22 billion during the same period last year.

Chesapeake declared first quarter of 2016 adjusted net loss available to common stockholders of $120 million or $0.10 of loss per diluted share compared to adjusted net loss of $168 million or $0.16 of loss per diluted share and adjusted net income of $42 million or $0.11 per diluted share in first quarter of 2015.

The key energy company reported continued year-over-year decline in both its top and bottom lines primarily driven by the ongoing weaker global commodity demand and pricing environment coupled with the expanding exploration expenditures, negatively impacting the company’s core margins.

Improving its asset profile  

Chesapeake is continuing to accelerate the value delivery at Meramec through partial monetization of the asset for nearly $470 million, driving significant shareholder value.
In addition, the energy company is holding a solid position after strategic divestitures of non-core assets in 2016 with approximately 52,000 acres remaining in stack corridor and about 1.5 million acres outstanding in the Mid-Continent. Through this strategic capital preservation plan, Chesapeake has gained the opportunity to redirect approximately $100 million of accessible capital towards other key investment opportunities. Importantly, the unique monetization of Meramec has not impacted the company’s borrowing base.

The oil and gas mining company is following a superior capital discipline program to preserve cash amid a tough global operating environment and thus, achieved 75% year-over-year decline in capital expenditure for the first quarter of 2016. Further, Chesapeake is well on track for achieving over 50% decrease in net capital spending for fiscal year 2016 compared to 2015. A bulk of 2016 estimated capital expenditure is focused on strategic DUC inventory write-down which is in line with the company’s continued commitment to optimize its financial position.

Chesapeake is also somewhat reducing its quarter-over-quarter production for 2016 compared to last year for uniquely preserving cash. The company targets on reducing G&A by 15% along with LOE reduction by 10% during 2016. Chesapeake has made significant progress in strategically achieving 28% or nearly $100 million year-over-year reduction in cash costs for first quarter.

The planned divestiture of non-core assets coupled with year-over-year reduction in energy production for the quarter aligns well with the company’s core strategy to preserve cash and minimize non-core expenditures which only is insufficient to bring Chesapeake back on the path to profitability.

Strong assets

Chesapeake has approximately 8.0 million net acres available in developed and emerging leasehold in its well-diversified U.S. onshore asset portfolio comprising of Powder River Basin, Utica shale, Marcellus Shale, Mid-Continent, Barnett Shale, Eagle Ford Shale and Haynesville Shale.

The energy corporation is notably minimizing total F&D costs all through its asset portfolio while delivering continued capital efficiency growth and attractive cost improvements are projected for 2016.

The notably diversified asset portfolio of Chesapeake should give confidence to the investors about solid stock recovery as the global commodity demand and pricing conditions improve gradually and recovery unfolds completely. Moreover, the cost-optimization efforts of Chesapeake are expected to support the company in sustaining its daily operations profitably.

Chesapeake has strategically adopted a superior commodity hedging position to minimize losses in the globally weaker commodity pricing environment. Certain hedging details include 73 bcf and 2.9 mmbbl of 2017 gas and oil volumes hedged with swaps at $2.92 and at $42.53 respectively. The continuing credit collateral support is complementing the company’s significant hedging position.


Overall, the investors are advised to “Sell” any equity held in Chesapeake Energy Corporation considering the company’s weaker growth prospects with PEG ratio of 0.23 only which is comparable to the industry’s growth average of 0.01. The profit margin of -115.05% signifies no profit but loss. Further, Chesapeake is hugely debt-burdened with significant total debt of $10.76 billion against weaker total cash position of $825.00 million only, restricting the company to continue with its daily operations profitably.
Published on Jun 24, 2016
By Subhen Mittra

Copyrighted 2020. Content published with author's permission.

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