Chesapeake Energy (CHK) turned in a strong performance last year, minus the fourth-quarter results. The results missed estimates by a large margin as the company had to deal with one-time charges with respect to employee termination costs and discounted rig lease contracts.
Besides, Chesapeake Energy lost nearly 6,000 barrels of oil per day due to unfavorable weather conditions like heavy rain, flooding, and freeze-offs that affected its results in the last quarter, primarily in South Texas and in the Mid-Continent regions. In addition, the company incurred an additional loss of production at Utica due to the loss of the Natrium gas processing facility during the quarter.
Still on track
Despite these challenges that severely affected its performance in the quarter, Chesapeake was able to achieve its guidance as production was above the mid-point of expectations set at the beginning of the quarter. Also, the company went a step forward and made a good come back through various initiatives such as spin-offs and asset sales that helped it post relatively good numbers.
Chesapeake Energy posted revenue of $4.54 billion, an increase of 28% year-over-year, despite the headwinds mentioned above. Yet, its bottom line could not escape the effects of one time charges as it incurred a net loss of $159 million, as against a net profit of $250 million in the corresponding period last year. Excluding one-time charges, the company posted net income of $161 million for the quarter.
Reducing the burden
Chesapeake Energy’s strategic initiatives to sell off its non-core assets should assist reducing its debt that currently remains at $13. billion. Besides, the company is terminating employees as a part of its restructuring strategy. The company is taking various such initiatives that will increase its competitiveness and build a solid financial foundation that will enable it to be successful through the commodity price cycle.
In addition, Chesapeake Energy is in negotiations with Access Midstream and Exterran to sell 437 natural gas compression units and related assets in two separate deals for approximately $520 million. The natural gas producer is selling its assets to cover the $1 billion gap between operating cash flow and capital expenditure.
The company also plans to cut its expenditure by 20%, which is an impressive step, and increase its operational efficiency in the future. Chesapeake Energy is set to spin off its oil field services division as well, in both exploration & production and oilfield services, which should help the company.
Chesapeake Energy expects gas price differentials to catch up significantly in the near future due to strong pricing in the Northeast. Besides, the company has hedged itself for the second, third, and fourth quarters of 2014 that will help it against volatile pricing.
Chesapeake is aggressively focused on decreasing its costs and various other unwanted charges through various measures stated above. Consequently, it has improved its cash position and net working capital deficit, net long-term debt, and other long-term liability positions by $922 million in aggregate. It has also repurchased certain drilling rigs and compressors subject to sale-leaseback transactions, which will reduce leverage and facilitate the oilfield services spin-off.
Natural gas price forecast
Chesapeake Energy expects natural gas prices to get better in the future. Also, according to the EIA, natural gas prices are expected to average $4.44 per million British thermal units this year and $4.14 in 2015, which is comparatively better than previous estimates of $4.17 and $4.11, respectively. Hence, Chesapeake is doing the right thing by strengthening its balance sheet, and given the company’s dominating position in the natural gas industry in the U.S., its performance should improve as prices get healthier in the future.
Currently, Chesapeake has a trailing P/E of 36, and a promising forward P/E of 12 indicates that earnings growth can be expected going forward. The company is making some decisive moves to make its operations more efficient. This is important and could reap rich rewards for Chesapeake when natural gas prices rise, enabling the company to come out of its slump.