Chesapeake’s Large Q1 Loss Isn’t All Bad News

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Chesapeake Energy Corp. (NYSE: CHK) remains in turnaround mode after the Aubrey McClendon years. Despite having tried to move to more of a mix of oil and gas, Chesapeake reported a larger net loss $44 million, or $0.03 per share, from $6 million ($0.01 per share) a year earlier.

The headlines sound bad, but the earnings report on an adjusted basis evaluated by analysts came to earnings of $0.14 per share. This met the Refinitiv consensus target. Chesapeake noted that the quarter showed a continued shift to a higher oil mix and a focus on cutting expenses.

It turns out that the net loss came as Chesapeake has been spending more than analysts anticipated, and then there were lower oil and natural gas prices that also played a role. Capital expenditures came to $605 million in the quarter, and that was reported to be more than 20 million higher than expected. With prices still mixed, oil and gas producers have faced continued pressure by the investing community to keep capital spending low and to return cash to shareholders in the form of share buybacks and dividends.

Chesapeake’s earnings report indicated that daily average production was down by 12.6% to about 484,000 barrels of oil equivalent per day (from 554,000 a year earlier). While lower prices prevailed, that production was actually about 4% higher than expectations. Where the higher production hurt was that average realized prices for natural gas were down by 12% (to $3.07 per thousand cubic feet) and natural gas liquids prices were down by 21% (to $20.03 per barrel). Oil prices fell marginally to $56.86 per barrel (down just three cents).

Chesapeake closed on its acquisition of WildHorse Resource for its oil play in February, and that $4 billion merger gave it a stronger footprint in oil-rich acreage in Texas. The company believes that it is now on track to deliver on transformational oil growth in 2019. The release said:

Driven by shallower production declines in South Texas due to well spacing and base production improvements and continued improvement in the Powder River Basin, which achieved record production during the quarter and again in the month of April 2019, the company remains on track to deliver oil growth of approximately 32% with a year-end oil mix of approximately 26%.

Chesapeake also signaled in its release that approximately 70% of its 2019 forecast production for oil, natural gas and natural gas liquids was hedged as of May 3, 2019. The release included that approximately 70% and 80% of its remaining 2019 forecasted oil and natural gas production at average prices of $58.75 per barrel and $2.83 per thousand cubic feet, respectively. Chesapeake also showed that it has basis protection on approximately 6 million barrels of its remaining projected 2019 Eagle Ford oil production at a premium to West Texas Intermediate of approximately $5.69 per barrel. WTI was last seen trading at $61.62 on Wednesday morning.

Doug Lawler, Chesapeake’s president and chief executive, gave an official statement for the quarter:

We continue to execute on our strategic priorities and once again delivered strong financial and operational results. The encouraging early results from our Brazos Valley business unit, which we now project will be cash flow positive at the asset operating level in 2019, demonstrates our capability to apply our capital and operating efficiency to immediately transform a new asset in our portfolio. We believe we will see significantly more savings in the year ahead as we fully integrate our Brazos Valley operations into Chesapeake. With our transformational oil growth and capital efficiency continuing to improve, our confidence is strong as we drive towards achieving our strategic priorities of meaningful margin enhancement, sustainable free cash flow and a net debt to EBITDAX ratio of two times.

Chesapeake shares were down initially by 4% at $2.68 at the open, but they were last seen up by four cents at $2.82 on Wednesday morning. The stock has a 52-week range of $1.71 to $5.60, and it previously had a consensus target price of $3.07.

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