Chesapeake Energy: a Good Bet

Chesapeake Energy (CHK) announced second quarter ended June 30, 2016 total revenue of $1.62 billion, down 54 percent year-over-year from $3.52 billion during the same period last year.

Chesapeake declared second quarter of 2016 net loss of $1.75 billion or $2.48 of loss per diluted share compared to a net loss of $4.11 billion or $6.27 of loss per diluted share in second quarter of 2015.

The energy production company reported continued year-over-year decline in both its top and bottom lines primarily due to the ongoing weakness in the global commodity demand and pricing environment coupled with the rising energy exploration and transportation expenditures, eating into the company’s key margins.

Lower costs and strong reserves are positives    

The attractive cost-optimization efforts of Chesapeake from 30th September 2015 till 30th June 2016 has allowed the company to reduce 2017 puttable/maturing debt commitments by approximately $830 million while allowing it to uniquely grow the consolidated additional liquidity by about $730 million since 30th September 2015 by proactively implementing liability management.

Moving ahead, Chesapeake is continuing to improve its total cash costs both, quarterly and annually and plans to lower LOE spending by 10% and G&A expense by 15% during 2016.
Chesapeake Energy: a Good Bet
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Further, Chesapeake has made significant progress on minimizing cash costs in the beginning of 2016 with approximately 25% year-over-year lowering in cash costs measured in $/boe during the second quarter and nearly $102 million year-over-year decrease in total cash costs during the period.

Chesapeake has witnessed approximately $8.0 billion improvement in total reserve value leveraging NYMEX pricing compared to the 30th June 2016 SEC valuation. Also, the company has notable flexibility in pricing of the natural gas. PV-9 is priced at $11.9 billion considering the 30th June NYMEX strip pricing schedule and tactically used in the determination of bank collateral. Importantly, Chesapeake has notable high-value delivering asset portfolio with impressive value locked in undeveloped and developed acreage.

The attractive long-term growth delivering assets portfolio coupled with superior cost-optimization efforts of Chesapeake is believed to deliver sustainable and lasting company growth while offering attractive shareholder returns over the longer term.

Strong production areas    

The Haynesville Shale has significant shift in overall economics with extended laterals and completions optimization notably growing NPV and ROR in all key areas. CA during the first half has confirmed the capability to flow at greater and sustainable rates in the basin leveraging superior stim design. The company is delivering hugely impressive well performance through stretched laterals having modern completions.

Moreover, there’s a full-field transformation at Haynesville Shale with cutting-edge well design growing field-wide productivity, the company having purchased approximately 70 thousand total acres for about $87 million and industry-leading gas assets having significant admittance for gulf markets. Therefore, notable superior-quality company’s inventory provides value growth through selected divestment opportunities.

Chesapeake’s attractive capital efficiency at Eagle Ford Shale is driving industry-leading returns with impressive well performance till date for prolonged lateral schedule, attractive nearly 50% reduction in per-foot growth expenditures and present returns on growth schedule at about $45/bbl oil is outperforming the 2014 schedule at nearly $80/bbl oil. Further, ROR for the complete fiscal year 2016 growth program is estimated to be in the range of 25% to 65%.

The superior production dynamics of Haynesville Shale and attractive capital efficiency delivered at the Eagle Ford Shale is expected to drive sustainable long-term competitive returns, benefiting both near-term and long-term investors.


Overall, the investors are advised to “Hold” their position in Chesapeake Energy Corporation considering the company's attractive long-term growth prospects but currently weaker financial position with notable total debt of $9.65 billion against weaker total cash position of $4.00 million only, restricting the company to make future growth investments. However, the profit margin of -98.79% is disappointing and depicts no profit but loss. The PEG ratio of 0.66 seems misguiding and signifies weaker company growth.
Published on Aug 25, 2016
By Yaggyaseni Mittra

Copyrighted 2020. Content published with author's permission.

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