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Chesapeake Energy (NYSE:CHK) Reports Q2 Losses; Fails to Surpass Earnings Estimate

Chesapeake Reports Q2 Losses; Fails to Surpass Earnings Estimate
The energy giant has reported disappointing quarterly results as crude oil and natural gas market struggle to post a persistent recovery

Chesapeake Energy Corporation (NYSE:CHK) reported its second quarter of fiscal 2016 (2QFY16) financial results before the market closed on August 4. The oil and gas major posted significant decline in its earnings as cheap crude prices weighed down its financial performance.

Net Income

The Virginia-based company posted adjusted net loss of $103 million for the quarter. This was considerably lower from the net loss of $126 million in the same quarter last year while down from the net loss of $120 million in the previous quarter. Consensus expected net loss of $106 million but the company beat this estimate by 3.54%.

It posted $0.14 loss per share in 2Q, up from $0.11 loss per share in the same period a year ago and $0.10 loss per share in the previous quarter. The company failed to beat consensus expectations of $0.1 loss per share by 30.84%.

Strong Revenues

Revenues for the second quarter clocked in at $3.57 billion compared with $1.95 billion in the preceding quarter and $3.03 billion in the same quarter of last year. Analysts had expected the company to post revenue of $1.9 billion for the quarter but Chesapeake missed the estimate by a significant margin of 81.59%.

Cash Flow Position

The cash flow from operations in the second quarter amounted to $176 million. This is significantly down from $572 million in the same period a year ago and from $263 million in the last quarter. All figures are taken prior to adjusting for changes in assets and liabilities.

Production

Production for the quarter averaged around 657,100 barrels of oil equivalent per day. Production in 2Q stood at 60 million barrels of oil equivalent. This was considerably down from the production of 64 million barrels of oil equivalent in the same quarter a year ago, while slightly lower from 61 barrels of oil equivalent in the last quarter.

Natural gas production at the closing of the quarter stood at $269 bcf, down from 276 bcf in the last quarter and 275 bcf in the same period, a year earlier.

Natural gas liquid production during the quarter was 269 bcf, lower than 276 bcf in the last quarter and from 275 bcf in the preceding year’s second quarter.

Following the second quarter results, Chesapeake upped its full-year guidance by 3%. Reflecting on the output levels, Doug Lawler, CEO of the company commented: “As a result of our portfolio's strong performance to date in 2016, we have increased our total production guidance for the remainder of the year. As for an initial look into 2017, we believe our oil production will be relatively flat in 2017 as compared to 2016, while total production volumes are projected to be down approximately 5% compared to 2016 levels. With the breadth and depth of our large acreage position, the evolution of technologies being applied to our portfolio and the reduction in our leverage and complexity, we believe that the next few months will be a very exciting time for Chesapeake."

Asset Dispositions

During the quarter, disposal proceeds generated from asset sales amounted to $964 million, after adjusting for post-closing figures. A consideration exceeding $100 million was withheld subject to environmental and standard contingencies and a certain title. The company plans to recover a majority of this in the next quarter. In line with a few of these sales, the company bought back oil and natural gas stakes that were earlier sold to third parties for roughly $259 million.

Chesapeake plans to take its asset disposition program further aiming to sale additional properties including a share of its Haynesville Shale properties. In the wake of this, the company has upped its asset sale full year guidance to now exceed $2 billion, compared to its previous range of $1.2 to $1.7 billion.

The company’s portfolio in 2Q was substantially optimized due to sale of its non-core assets. In also acquired working stakes to up its Haynesville Shale acreage position for approximately $87 million. This increased Chesapeake’s average operating stake in the region to 83%, while adding around 70,000 net acres to its acreage position.

Capital Expenditure and Rig Count

The company’s total capital expenditure for the quarter totaled $456 million, up from $365 million in the last quarter, while down from $957 million in the same period, a year ago. Of this, drilling costs amounted to $337 million, up from $281 million in the last quarter while down from $787 million on a year-over-year (YoY) basis. In addition, the average operated rig count of the oil company was nine in the second quarter, up from eight in the last quarter while considerably down from 26 in the second quarter of last year.

Owing to the sequentially increased rig count and additional completion activity that came from the acquisition of stake in the Haynesville Shale, the energy giant aims to be at the top end of its capital expenditure guidance of $1.3 to $1.8 billion.

Due to effective capital spending, the oil giant plans to have a flat rig count throughout the year while drilling additional 100 wells and placing additional 75 wells on production.

Costs and Expenses

The company’s cost saving initiatives contributed positively to the second quarter earnings. Improvements in the company’s cost structure led it to cut back its full year production expense guidance. Cash expenses for the quarter totaled due to cost discipline. Total operating expenses for the quarter totaled $3,379 million in the quarter, down from $9,028 million YoY. Depreciation and amortization charges of oil, gas, and natural gas liquids were $265 million during the quarter, down from $601 million in the same period, last year. Production taxes for the quarter were $19 million down from $34 million in 2QFY15.

Apart from this, production expenses averaged at $3.05 per barrel of oil equivalent. General and administrative expenses, after accounting for stock based compensation were $4.07 per barrel of oil equivalent, down by 25% YoY and by 2% on a sequential basis. In the wake of the low costs, Mr. Lawler stated: "With continued improvements in our operating expenses and the disposition of non-core properties, we have refined our portfolio to provide a more competitive foundation for Chesapeake.”

Improved Liquidity

At the end of the three months ended June 30, debt principal of the company stood around $8.7 billion. This included $100 million in borrowings outstanding on the energy giant’s $4 billion revolving credit facility. This is down from the revolving credit facility of $9.7 billion as at December 31 last year and from $11.7 billion as of June 30, last year.

During the quarter, the company increased its $4 billion facility to raise its financial viability to issue secured loan notes. Long-term net debt as at June 30 was $8,621 million down from $10,311 million as at December 31 last year. Mr. Lawler stated: "In 2016, we have made substantial progress on many fronts, including the reduction of more than $1 billion of debt.”

The acquisition of oil and gas interests by the company has made the portfolio of the company less complex. In light of the liquidity position, Mr. Lawler stated: "Financial discipline remains our top priority and we continue to work toward additional solutions to improve our liquidity, reduce our midstream commitments and enhance our margins.”

Business Finance News believes that Chesapeake, the second largest oil producer in the US posted low earnings as it navigates through the low commodity price environment. Following its second quarterly results for 2016, stock is down 3.02%, currently trading at $5.13 per share in the pre-market hours today. Despite this, we believe that the asset disposition plan by the company will largely help it bolster its balance sheet position.

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