Chesapeake Energy Corporation (CHK) Announces Q1:17 Results; Shares Tumbling


Chesapeake Energy Corporation (NYSE:CHK) reported financial and operational results for the 2017 first quarter plus other recent developments. Highlights include:

  • Average 2017 first quarter production of 528,000 boe per day, above midpoint of guidance of 515,000 to 535,000 boe per day
  • Oil production expected to reach 100,000 barrels per day by year-end 2017; average 2017 first quarter oil production of 83,700 barrels per day, above midpoint of guidance of 80,000 to 85,000 barrels per day
  • Combined production and G&A expenses per boe down 2% quarter over quarter
  • Gathering, processing and transportation expenses per boe down 6% quarter over quarter

Doug Lawler, Chesapeake’s Chief Executive Officer, commented, “Our operational momentum continues to build in our Eagle Ford, Powder River Basin and Mid-Continent oil assets, as we remain on track to reach our production target of 100,000 barrels of oil per day by year-end. We expect our production to grow significantly in the second half of 2017 as we place more wells to sales, and as a result, we have raised the bottom range of our 2017 production guidance. We remain focused on improving our balance sheet and decreasing our cash costs, while improving the capital efficiency from our operations. We look forward to reporting our results as the year progresses.”

2017 First Quarter Results

For the 2017 first quarter, Chesapeake’s revenues increased by 41% year over year and 36% quarter over quarter primarily due to an increase in the average realized commodity prices for the company’s production and unrealized hedging gains, partially offset by a decrease in production volumes sold. Average daily production for the 2017 first quarter of approximately 528,000 barrels of oil equivalent (boe) consisted of approximately 83,700 barrels (bbls) of oil, 2.342 billion cubic feet (bcf) of natural gas and 53,900 bbls of natural gas liquids (NGL).

Average production expenses during the 2017 first quarter were $2.84 per boe, while G&A expenses (including stock-based compensation) during the 2017 first quarter were $1.35 per boe. Combined production and G&A expenses (including stock-based compensation) during the 2017 first quarter were $4.19 per boe, an increase of 1% year over year and a decrease of 2% quarter over quarter. Gathering, processing and transportation expenses during the 2017 first quarter were $7.47 per boe, a decrease of 5% year over year and 6% quarter over quarter, primarily due to the company’s Barnett and Devonian divestitures in 2016.

Chesapeake reported net income available to common stockholders of $75 million, or $0.08 per share, while the company’s ebitda for the 2017 first quarter was $455 million. Adjusting for unrealized gains on commodity derivatives, impairments related to the reduction of crude transportation commitments on the Seaway Pipeline and other related natural gas transportation obligations of approximately $393 million, the loss on exchange of preferred stock and other items, including those that are typically excluded by securities analysts, the 2017 first quarter adjusted net income attributable to Chesapeake was $212 million, or $0.23 per common share, while the company’s adjusted ebitda was $525 million in the 2017 first quarter. .

Capital Spending Overview

Chesapeake’s total capital investments were approximately $576 million during the 2017 first quarter, compared to approximately $463 million in the 2016 fourth quarter and $365 million in the 2016 first quarter.

Balance Sheet and Liquidity

As of March 31, 2017, Chesapeake’s principal debt balance was approximately $9.1 billion with $249 million in cash on hand, compared to $10.0 billion with $882 million in cash on hand as of December 31, 2016. The company’s total liquidity as of March 31, 2017 was approximately $3.3 billion, which included cash on hand and borrowing capacity of approximately $3.1 billion under the company’s senior secured revolving credit facility, which had no outstanding borrowings and $697 million utilized for various letters of credit (including the $461 million supersedeas bond with respect to the 2014 redemption of Chesapeake’s 6.775% Senior Notes due 2019 (“2019 Notes”) litigation).

On April 24, 2017, Chesapeake received notice from the U.S. Supreme Court that it would not review its appeal related to the company’s 2019 Notes litigation. As a result of this decision, the company satisfied the judgment of $441 million on April 28, 2017, with cash on hand and from the company’s revolving credit facility. While the company is disappointed in the Supreme Court’s decision, it had posted a supersedeas bond for the full amount (reflected as an outstanding letter of credit under the company’s revolving credit facility described above), and therefore the judgment had no further impact on liquidity.  As of May 1, 2017, after making the judgment payment and pro forma the relief of the associated letters of credit, Chesapeake’s liquidity was approximately $3.3 billion.

Operations Update

Chesapeake’s average daily production for the 2017 first quarter was approximately 528,000 boe and is further detailed in the table below. Chesapeake’s projected production volumes and capital expenditure program are subject to capital allocation decisions throughout the year and may be adjusted based on prevailing market conditions.

Chesapeake is currently utilizing 19 drilling rigs (above the 2017 first quarter average of 16) across its operating areas, seven of which are located in the Eagle Ford Shale, five in the Mid-Continent area, three in the Haynesville Shale, two in the Powder River Basin and two in Northeast Appalachia. Chesapeake plans to utilize an average of 17 rigs throughout the year and intends to spud and place on production approximately 400 and 450 gross operated wells, respectively, in 2017.

In the Eagle Ford Shale, Chesapeake placed the Blakeway 1C DIM 2H well in production in March 2017 and it reached a peak production rate of approximately 2,800 bbls of oil per day (3,184 boe per day). The Blakeway well had a 9,800′ lateral and was completed with higher proppant concentration per foot of lateral and reduced cluster spacing compared to the company’s historical completion methods. The company expects to place several more wells on production with these enhanced completion techniques in 2017. The company also drilled its first Upper Eagle Ford Shale well, the Blakeway 3D DIM 2H, with an 11,300′ lateral. This well was fracture stimulated and placed in production on May 3, 2017. The company expects to report a production test rate on this well later this month.

In the Powder River Basin (PRB), Chesapeake’s first Turner well, the Sundquist 9-34-71 USA A TR 13H, was drilled with a 7,100′ lateral and placed in production in March 2017, reaching a peak rate of 2,560 boe per day (78% oil). Average daily gross cumulative production from the Sundquist well was approximately 1,522 boe per day during its first 30 days of production, resulting in cumulative gross oil production of approximately 36,000 bbls over that time. The company expects to place its second Turner well, the Rankin 5-33-68 A TR 1H drilled with a 4,500′ lateral, on production soon and report a production test rate on this well later this month. Chesapeake plans to drill up to 10 additional wells in the Turner formation in 2017. Chesapeake also placed on production its first of two scheduled Parkman wells this year, the Sundquist 9-34-71 USA A PK 15H, with a 7,000′ lateral which, while currently production constrained, has reached a peak rate of 714 bbls of oil per day (763 boe per day). Chesapeake also placed three notable Niobrara wells on production during the 2017 first quarter which had been drilled, but uncompleted, that had peak rates of approximately 750, 1,155 and 1,215 bbls of oil per day (1,575, 1,650 and 1,930 boe per day), respectively. Chesapeake expects additional results from these and other formations in the PRB, including the Sussex and a deeper Mowry test, later this year.

In the Mid-Continent, Chesapeake drilled its first extended-lateral well in Major County targeting the Saint Genevieve formation (Meramec silt). This well had a completed lateral length of 9,900′ and was placed in production in late April of 2017. The company expects to report a production test rate on this well later this month. Chesapeake expects to drill up to 20 additional extended-lateral wells in the Saint Genevieve formation in 2017. The company also expects to test additional formations in its Mid-Continent area, including the Chester limestone and sandstone formations, later this year. Chesapeake controls approximately 230,000 net acres that it believes are prospective for the Chester and has drilled and collected two full core samples of the section earlier this year to help optimize its completion designs. The company expects first results from the Chester in the third and fourth quarters of 2017.

Shares of Chesapeake Energy are tumbling nearly 8% to $5.07 in Thursday’s trading session. CHK has a 1-year high of $8.20 and a 1-year low of $3.56. The stock’s 50-day moving average is $5.61 and its 200-day moving average is $6.21.

Sentiment on the street is mostly neutral on CHK stock. Out of 11 analysts who cover the stock, 6 suggest a Hold rating , 3 suggest a Buy and 2 recommend to Sell the stock. The 12-month average price target assigned to the stock is $6.91, which represents a potential upside of 25% from where the stock is currently trading.

Chesapeake Energy Corp. engages as a natural gas and oil exploration and production company. It operates through the following segments: Exploration and Production; and Marketing, Gathering and Compression. The Exploration and Production segment focuses on finding and producing natural gas, oil and natural gas liquids. The Marketing, Gathering, and Compression segment deals with the marketing, gathering, and compression of natural gas, oil, and natural gas liquids primarily from Chesapeake-operated wells.