Chesapeake’s Results To Improve Backed By Higher Price Realizations
Chesapeake Energy (NYSE:CHK), one of the largest natural gas producers in the US, is set to post a strong improvement in its financial numbers for the December quarter and full year 2017 before the market opens on 22nd February 2018((Chesapeake Energy To Announce December Quarter 2017 Results, 19th January 2018, www.chk.com)). The recovery in the company’s top-line as well as bottom-line will be largely driven by the rebound in commodity prices during the year. According to the company’s latest press release, it plans to deliver on its production targets for the year, close further asset sales in the first half of 2018, and continue to focus on its cash flow neutrality target. We have a price estimate of $5 per share for Chesapeake Energy, which is higher than its market price. However, we will revise our model shortly, based on the company’s full year 2017 results to reflect its actual numbers and future guidance.
Key Trends Witnessed In 4Q’17
- With the extension of the Organization of Petroleum Exporting Countries’ (OPEC) production cuts in the fourth quarter, commodity prices witnessed a sharp rise. The WTI crude oil prices averaged at $55.26 per barrel for the December quarter, notably higher than the $48.18 per barrel of the previous quarter. For the full year 2017, WTI oil prices stood at $50.80 per barrel, 17% higher than 2016. Thus, we expect this higher price realization to boost Chesapeake’s revenue for the quarter as well as the full year 2017.
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- Key Takeaways From Chesapeake’s Q1
- Chesapeake expects its December quarter production to average at 593,000 barrels of oil per day (bpd), representing a 15% jump from the same quarter of 2016. Of this, 100,000 bpd is expected to be oil production, which will enable the company to reach its targeted production for the year.
- Chesapeake has signed three separate sales agreements in the last 3-4 months for properties in its Mid-Continent operating area for aggregate consideration of roughly $500 million. One of the sales was closed last month, while the two others are expected to close by the end of the second quarter of 2018, subject to certain customary closing adjustments. While these sales might include the loss of 23,000 bpd (net) of production to Chesapeake, it will allow the company to bring down its outstanding debt and reduce its annual interest expense as well as improve its leverage.
- The company also raised roughly $78 million from the sale of 4.3 million shares in the initial public offering (IPO) of FTS International (NYSE: FTSI), a provider of hydraulic fracturing services in North America in which Chesapeake has owned a significant stake since 2006. The proceeds of this sale will also be utilized to improve the company’s capital structure through a paring down of debt or share repurchase.
- Chesapeake continued to pay a quarterly dividend to its preferred shareholders indicating its willingness to share its cash flows with its investors.
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