Chesapeake Energy Corporation (NYSE:CHK): Think Beyond Q3 Numbers

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Summary:

  • Don’t worry about third quarter results.
  • Perception on the Stock changed after analyst meet
  • Year 2017 could be a turning point

Chesapeake Energy Corporation (NYSE:CHK) will release its third quarter results on November 3. The Street expects a loss per share of three cents on revenue of $2.18 billion. The company could suffer a loss in the current year on the estimated revenue drop of more than 35 percent.

However, things could change for the better next year. Though the oil and gas exploration has not been having a great time in the last two years, investor’s confidence in the stock has improved after the company’s analyst day meet. The most important aspect is that the company took advantage of the current market conditions and stacked potential in nearly every play. In effect, there are multiple growth opportunities in its portfolio. Therefore, it would not be just a question of having big acreage position but a question of drilling to deliver value to its shareholders.

The company’s big untapped resources are given below:

  • 28 BBOE Gross total resource OIP
  • 0.3 BBOE produced from the company’s acreage.
  • There is an estimated 3.6 BBOE undeveloped resource.

Chesapeake Energy Corporation (NYSE:CHK) saw 200 percent improvement in production per rig line in the current year from the last year. The company expects another 20 percent improvement in 2017. Let’s see some other catalysts which could dictate the course of changes next year.

Efficiency level has increased significantly from the average of five stages per day in 2015 to an average eight stages per day in the current year. The company has an ambitious target of average 12 stages per day in 2017 and 16 in the following year.

The cost per foot completion is expected to drop significantly from $557 in 2013 to $278 in the current year representing a reduction of about 50 percent. Chesapeake expects 17 percent reduction in LOE and joys the comfort of 40 percent below the average peer.

Chesapeake Energy Corporation (NYSE:CHK) is confident of achieving 5 -15 percent on an annualized basis. Street expects 12 percent top line growth next year. Similarly, the company plans to retire debt of $2 – $3 billion and cut the leverage to 2x net debt/ebitda in 2020 from the current levels. The company expects to double EBITDA by 2018.

In 2018, the company is confident of FCF neutrality with improvements from cost structure. There is no doubt that Chesapeake provided an optimistic outlook. For instance, the EBITDA growth plan is higher than the Street expected and the expectation of a FCF positive in 2018 has surprised investors.

The key takeaways from the meet are that the Chesapeake Energy Corporation (NYSE:CHK) is keen on simplifying its structure and invests in high return assets besides reducing the leverage. Aside from these, the expected improvements in margins and the enhanced balance sheet should offer a meaningful growth for investors.

If there is any doubt about achieving the target, RBC Capital Markets thinks that the outlook is achievable. The stock price in comparison with the sales is cheapest with 0.4 times compared to the 3.5 times enjoyed by the industry. The company also enjoys the credit of being the solid executor of plans.

Though there is a continuous challenge of the commodity price, the fact is that it is more stabilized or range-bound now than before in the current year. Therefore, if the oil price reaches $60 a barrel, the company stands to gain significantly as the company’s break-even point is around $40 per barrel.

Currently, the stock is struggling to rise because of the short positions. The market is also yet to realize the full implications of the data presented in the analyst meet. Once the market started to digest the Chesapeake Energy Corporation (NYSE:CHK)’s planned data, the stock could see a significant uptick. Therefore, the year ahead is a key factor for both the company and investors.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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