Key Takeaways From Chesapeake’s Q1

Chesapeake Energy (NYSE: CHK) released their first quarter 2018 results on 2nd May. The company reported a better than expected EPS (Non-GAAP) of $0.34 vs. an EPS of $0.23 (Non-GAAP) posted a year ago, benefiting from the company’s improving margins. Revenue, however, declined by 10% year-on-year (y-o-y), largely reflecting the decline in output as a consequence of the company’s recent asset sales. The company asserted that its total output increased significantly from the same period last year, adjusted for asset sales.

Chesapeake reported an 11% y-o-y increase in its total production of barrels of oil equivalent (boe) per day in the first quarter, with oil output rising by 16% y-o-y, providing a more favorable exposure to the liquid commodity. Higher production volumes were further aided by higher realized prices for oil and natural gas, which increased by 10% and 16%, respectively. Oil gained significant strength in the first quarter as a result of the extension of the oil production cuts by the Organization of Petroleum Exporting Countries (OPEC) and Non-OPEC allies coupled with the recent geopolitical tension in the Middle East and a weaker dollar.

The company also reported a notable margin improvement backed by higher production efficiency. Chesapeake reported approximately a 10% improvement in its adjusted EBITDA margin in the first-quarter, compared to the same period last year. Lower gathering, processing, and transportation expenses per boe aided to lowering overall per unit production expenses. Additionally, the company paid off $581 million worth of long-term debt, largely from the proceeds of its asset sales which are expected to provide substantial interest cost savings in the upcoming quarters.

Looking forward, the company plans on increasing its proportionate share of oil output to its total production volume through the ramp-up of its drilling activity in Wyoming’s Turner formation. The company is currently adding its fourth drilling rig in Wyoming’s Turner and hinted towards a possibility of adding another one this year. Consequently, Chesapeake expects its gas volumes to experience a modest decline over the year, compensated by an increase in oil volume growth.

The company additionally plans to continue to reduce its long-term debt through its strong cash flow position achieved via its recent asset sales, aided by the ongoing strength in commodity prices. We have kept our base case estimates unchanged based on the company’s current quarter results. You can make changes to our assumptions using our interactive dashboard to arrive at your own fair price estimate for the company.

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