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Chesapeake stock tumbles on earnings release

Chesapeake Energy posted fourth-quarter and full-year results for 2019 on Wednesday. [OKLAHOMAN ARCHIVES]
Chesapeake Energy posted fourth-quarter and full-year results for 2019 on Wednesday. [OKLAHOMAN ARCHIVES]

While Chesapeake Energy isn’t wavering on its plans, its investors are.

The Oklahoma City energy company's stock, traded on the New York Stock Exchange under the ticker CHK, lost nearly a third of its value Wednesday after the company released its financial and operational results for 2019.

The stock, which remains in danger of being relegated to over-the-counter trading within months, opened at about 44 cents a share and closed at about 31 cents a share.

Investors fled despite comments from CEO Doug Lawler, who said the company remains “fully committed” to its efforts to turn what had been a primarily natural gas-focused exploration and production company into one with more balanced production that generates free cash flow.

Lawler stated in an earnings release issued Wednesday before markets opened that Chesapeake’s leadership teams had accomplished much the past year.

He noted the company:

• Delivered average fourth-quarter oil production of 126,000 barrels per day, representing 26% of Chesapeake’s total production for the period and setting a record.

• Boosted its per barrel (equivalent) of fourth-quarter earnings before interest, taxes, depreciation, amortization and exploration and production costs by 15% year-over-year, despite weaker commodity prices.

• Eliminated $900 million and consolidated $1.5 billion more in debt associated with its acquisition of WildHorse Resources through various financial transactions in the fourth quarter.

“Our performance in 2019 positions us to target free cash flow in 2020,” Lawler stated as part of the release. “We remain fully committed to strengthening our company in 2020 by achieving free cash flow, improving well productivity and capturing further cost savings.”

Results detailed

Chesapeake reported before markets opened on Wednesday it posted a 2019 net loss of $308 million last year on about $8.6 billion in total revenue, translating into a per-share loss for investors of 25 cents.

In 2018, Chesapeake earned a profit of $228 million on about $10 billion in total revenue, translating into a per-share net income for investors of 15 cents.

The company’s adjusted earnings for 2019 was about $2.5 billion, compared to about $2.4 billion the previous year.

Its average daily oil production climbed from 90,000 barrels in 2018 to 118,000 in 2019.

It cut its total operating expenses from about $9.6 billion in 2018 to about $8.6 billion in 2019. Average gathering, processing and transportation expenses fell in 2019 to $6.13 per barrel of oil (equivalent) from $7.35 the previous year.

The company brought 375 wells to market across its multiple plays in 2019 using a capital expenditures budget of about $2.2 billion.

It plans to spend between $1.3 to $1.6 billion in 2020, using 80% of that in areas where it expects to find the most oil.

In 2020, it expects to:

• Run between two and three rigs in its Brazos Valley area of central Texas and to bring between 55 and 65 wells to market.

• Run between three and four rigs in its Eagle Ford area of south Texas and to bring between 110 and 120 wells to market.

• Run two rigs in its Powder River Basin area of Wyoming and to bring between 25 and 30 wells to market.

• Run two to three rigs in its Marcellus Shale area of Pennsylvania and to bring 50 to 55 wells to market.

• Run a single rig through the first quarter in its Haynesville Shale area in Louisiana and to bring five to 10 wells to market.

In its mid-continent area in Oklahoma, the company doesn’t intend to run a rig. It does, however, intend to bring 10 to 15 drilled but uncompleted wells targeting the Oswego formation to market.

The company is using swaps, collars and spread arrangements to hedge 70% of its 2020 forecast oil production and more than half of its forecast natural gas production against weak commodity pricing.

Lawler stated the company intends to meet its debt maturity obligations in 2020 using between $300 million and $500 million it expects to raise through the sale of non-core assets.

“We expect oil production will remain relatively flat year over year,” Lawler said in a statement, adding that the company expects its total production will decline along with gas volumes from currently producing wells.

Analysts’ takes

Independent investment research firm CFRA published a note Wednesday that recommends investors continue to hold Chesapeake stock, though it also lowered its target price for 2020 based on its estimate of the company’s operating cash flow during that period.

The note observed Chesapeake’s intent to use cash raised through non-core asset sales to retire $300 million in debt expected to mature this year and another $290 million expected to mature in 2021 largely will depend on commodity pricing.

“This strategy is subject to the market, which is unlikely to be interested in natural gas assets given weak pricing, in our view, though higher-margin oil assets may have a higher chance,” its note reads.

While CFRA and Zac Reynolds, chief investment officer at Full Sail Capital in Oklahoma City, both like the company’s hedging plans, Reynolds said he remains concerned about the company’s long-term outlook.

“Chesapeake’s leadership team is trying to do the right things,” Reynolds said, “but the company just can’t seem to catch a break.

“We already were seeing how it and other energy companies were being impacted by weaker commodity pricing because of global economic worries, and that only has been exacerbated by the outbreak of the coronavirus.

“That will make it really hard for Chesapeake to achieve the positive cash flow it’s targeting.”

Jack Money

Jack Money has worked for The Oklahoman for more than 20 years. During that time, he has worked for the paper’s city, state, metro and business news desks, including serving for a while as an assistant city editor. Money has won state and regional... Read more ›