Why Chesapeake Earnings Wowed Investors

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Chesapeake Energy Corp. (NYSE: CHK) reported fourth-quarter and full-year 2017 earnings before markets opened Thursday. For the quarter, the oil and gas exploration and production company posted adjusted earnings per share (EPS) of $0.30 on revenues of $2.52 billion. In the same period a year ago, the company reported adjusted EPS of $0.07 on revenues of $2.02 billion. Fourth-quarter results also compare to consensus estimates for EPS of $0.24 and $2.3 billion in revenues.

For the full year, Chesapeake reported adjusted EPS of $0.82 and revenues of $9.5 billion, compared with a year-ago loss of $0.05 per share and revenues of $7.87 billion. Analysts were looking for $0.76 in EPS and revenues of $9.29 billion.

Unhedged revenue for oil, natural gas, and natural gas liquids (NGLs) rose 16% year over year due to a 3% increase in volume and higher commodity prices. Investors loved these two numbers this morning.

The company’s outlook for fiscal¬†2018 includes production growth of 1% to 5% (adjusted for asset sales), oil production of 51 million to 55 million barrels, natural gas production of 190 million to 200 million barrels of oil equivalent, and NGL production of 20 million to 22 million barrels. That compares to 2017 totals of 33 million barrels of oil, 878 billion cubic feet of natural gas, and 21 million barrels of NGLs.

2018 production expenses are estimated at $2.60 to $2.80 per barrel of oil equivalent, compared with $2.81 in 2017 ($2.50 in the fourth quarter). Capital spending is forecast in a range of $1.98 billion to $2.38 billion (compared to approximately $2.46 billion in 2017). Chesapeake’s debt balance at the end of the quarter was $9.98 billion, essentially flat with the December 2016.

Analysts are calling for first-quarter EPS of $0.28 on revenues of $2.39 billion, as well as EPS of $0.83 on revenues of $8.92 billion for the full year.

CEO Doug Lawler said:

We expect to deliver production growth, adjusted for asset sales, of 1 percent to 5 percent on reduced capital expenditures. The expected improvements in our cost structure, as well as improved basis pricing differentials and higher NYMEX pricing, result in higher forecasted year-over-year cash flows.

Over the last four years, we have fundamentally transformed our business, removing financial and operational complexity, significantly improving our balance sheet, and addressing numerous legacy issues that have affected past performance. Chesapeake Energy continues to get stronger, and we believe we are well positioned to create meaningful shareholder value in the years ahead.

Operating cash flow more than doubled year over year, from $557 million in 2016 to $1.22 billion last year. Fourth-quarter cash flow rose to $577 million from a negative $107 million in the fourth quarter of last year.

Chesapeake’s shares traded up about 14% early Thursday at $3.00, after closing down about 5% on Wednesday at $2.63. The stock’s 52-week range is $2.53 to $6.59, and the consensus target price was $4.42 before this report. The highest price target prior was $8.00 a share.