Chesapeake Energy (CHK, Financial) released its second quarter results recently. The company posted a good improvement in the revenue, but oversupply in the U.S. North east caused oil, gas, and liquid prices to fall that eroded Chesapeake’s earnings. This impacted the stock price, leading to a drop in the shares soon after it posted its second quarter results. On the other hand, management of the company is anticipating that the higher than expected costs and the increase in the production taxes ate away at Chesapeake’s profit margins. It will be interesting to know how Chesapeake manages to gain market share and impress investors. Let us have a look.
Steady performance
Chesapeake’s revenue rose by 10% to $5.15 billion. This was better than last year’s same quarter revenue. The revenue reported by the company also topped analysts’ estimates of $4.6 billion on top line. The weakness within the company eroded its profits to half as compared to what it posted a year ago in the same quarter. The company was most disappointing on the earnings front with EPS of just $0.22 as compared to $0.66 per share a year ago. This also couldn’t meet the consensus estimates of $0.44 per share.
It is a big reason to worry for Chesapeake to bring back its earnings into momentum. The company is falling badly on the earnings front. The company has fallen much to $0.22 per share as compared to $066 per share in one year. It has to look out for a remedy to this problem. Chesapeake is focusing on various aspects to improve its profitability. There are ample of opportunities in front of it which it can explore. Since, Chesapeake is the second largest (U.S) producer of oil and natural gas.
These wells are now seeing a bad phase due to infrastructural short comings. It is facing transportation problem as there is a lack of good transportation. These are putting pressure to the cost and which are eroding its profit margins. It is working on getting things better to take advantage of this opportunity. Chesapeake finds enormous huge demands in this region in the winter season. The company is having ample time to work on its short comings in its Marcellus oil rich area. It is expecting better results from this well towards the end of the fiscal year in the last quarter.
In addition, Chesapeake is engaged aggressively in altering its financial structure. It is undertaking many cost cutting initiatives to improve its bottom line. It is much focused on delivering benefits to its share holder by improving the share holder’s wealth. After the weak performance on earnings part the company has cut down its capital spending by more than 27% in one year. This is impressive and the company thinks that with time it will be able to achieve good results on the back of its cost cutting efforts.
It is anticipated that oil price for the entire year will remain low. This will give more confidence to Chesapeake to deliver better results in future. Chesapeake has also increased its production guidance for the year. It is expecting this rate to increase more in the coming days. The company is also planning make an acquisition with Powder River Basin. This will leverage its overhead in geologic expertise in the region also, it will help the Chesapeake to increase its oil gross rate leading it to improve its margins. This initiative will also help Chesapeake to survive the weakness arising from the weak natural gas prices.
Conclusion
Chesapeake has strong fundamentals. With a trailing P/E of 19.94, the stock appears reasonable. Even the forward P/E of 21.64 indicates that the earnings of the company are also growing at an impressive pace. The third quarter might be weak for the company, but it is counting on a better fourth quarter as it is expecting its Marcellus oil rich area to yield good results. All these facts indicate that Chesapeake is definitely a stock to include in the portfolio.
