The fluctuating oil market has disappointed companies and investors, and it is not showing any signs of a turnaround. However, companies in this soft environment are aligning themselves to improve their profitability by either increasing production, cutting costs, or by waiting for oil prices to display a slight recovery.
Chesapeake Energy (CHK, Financial) is one such company that reported disappointing performance last quarter but is aiming for a turnaround. While peers such as Anadarko Petroleum (APC, Financial) and Marathon Oil (MRO, Financial) have also suffered, but they are better positioned than Chesapeake as they have less debt on their balance sheet. Thus, can Chesapeake tweak its operations and improve the state of its balance sheet going forward?
First-quarter financial highlights
Chesapeake had a soft first quarter in terms of financial performance. Chesapeake remained disappointing, reporting a net loss of $5.72 per diluted share which is far lower than the net income of $0.54 per diluted share in the same quarter last year.
EBITDA was also disappointing with $928 million as compared to $1.515 billion in 2014. This happened mainly due to the soft oil market which drove away its margins. While the operating cash flow of the company came in at $910 million in 2015 falling short of $1.614 billion it posted in the same quarter in 2014.
Chesapeake is well aware of the fact that the decline in the EBITDA and operating cash flow is mainly as a result of lower realized oil, natural gas and NGL prices.
But on the production side, Chesapeake’s year over year oil production improved by 14% while the average daily production that the company yielded was 121,900 barrels of oil, 2.9 billion cubic feet of natural gas and 75,800 barrels of NGL which represents an impressive 17%, 12% and 19% growth respectively.
Is Chesapeake a wise investment?
Chesapeake Energy is a company that mainly deals with natural gas, natural gas liquids and small portion of crude oil. The company used to be among the high flying stocks in the league, but the company has been badly affected by the falling commodity prices over the period. If we look at the five year stock price trends the stock has lost more than 50% of its value and if the oil prices don’t rebound the situations for Chesapeake can become grave. It is quite disappointing to notice that the company’s response towards slight rebound in the oil prices was also not up to the mark as compared to other players in the market so the investors might be cautious in their investment decisions when it comes to Chesapeake.
Moving ahead, it is interesting to know that Chesapeake’s production grew impressively by 14% in the recently reported quarter but it will not be a wise decision to take any investment initiative without comparing with industry outlook. Despite good production, Chesapeake is expecting lower production in 2015. The main reason affecting the production is the soft oil price market which is pushing the companies to drop operating rigs in order to be more efficient. If we compare recent production results with 2014 minutely we will see that the oil, natural gas and NGL have fallen by 8%, 6% and 27% respectively.
There are several other obstacles in its smooth flow. After a 55% drop in the NGL prices Chesapeake’s natural gas and NGL production is also expected to suffer. In order to reach good margins Chesapeake can take some brave steps. Even the Marcellus Shale is facing weakening output due to low gas prices and the company has also slowed down its drilling activities in this shale. On the other hand, EIA is also expecting Marcellus to remain flat until 2018 which is not a good sign for the company; however, some short rebound in the oil prices soon can reverse the situation for Chesapeake.
Ending remarks
Investment in Chesapeake now is a gamble. The company’s performance has declined and it is seeing no good support from the industry as well. Its key shale areas such as Eagle Ford and Marcellus are also suffering due to lower natural gas prices. The stock has fallen so much that a big rebound is also not expected even if the oil prices improve as in past as well when the oil prices strengthened, Chesapeake’s response to it was very nominal as compared to its peers such as Cabot Oil & Gas (COG, Financial). Investors should look for other healthy stock for good near-term gains.
