The story at Chesapeake Energy Corporation (CHK) has been about the company’s ability to master its debts. Those IOUs — which almost pushed CHK into bankruptcy to start 2015 — were created during the energy boom as Chesapeake Energy sought to become the nation’s largest natural gas driller.
Really, that debt is about the only thing that matters for the beaten-down energy stock. Earnings are almost irrelevant at this point.
Still, CHK stock holders got the best of both worlds this morning with Chesapeake’s latest earnings release. The company posted better-than-expected results and made some improvements to its liquidity and debt positions.
For long-suffering shareholders, this is the best present they could’ve gotten.
And while CHK stock is still a very risky play, that risk seems to be abating with each passing quarter.
Chesapeake Beats the Street
Chesapeake’s headline number of a 10-cent loss per share doesn’t exactly sound great, but it was decent, all things considered. Natural gas and oil prices still were in the dumps in the beginning part of the year, so the loss wasn’t shocking — in fact, the loss was a penny per share less than analysts were expecting.
Driving the upside surprise was a continued commitment to reduce costs. Capex has fallen by the wayside, and CHK continued to plow what little spending power it had left into lower-cost wells and shale plays.
Job cuts instituted last year didn’t hurt, either.
As a result, Chesapeake Energy managed to reduce its costs per well by an average of 28% for the quarter — a great improvement that helps free up some cash.
For the quarter, CHK also managed to deliver on its promise to sell more non-core assets. Over the last three quarters, Chesapeake managed to sell $1.2 billion in assets — substantially higher than it first predicted it would. Part of that was CHK’s new focus on what is considered “core.” It’s getting more interest from E&P firms as it sells “better” assets in its bid to focus on just a few top shale plays.
A highlight of this was its deal to sell 42,000 acres in the STACK play — once considered to be one of Chesapeake’s future crown jewels — to Newfield Exploration Co. (NFX).
CHK estimates that it could sell another $1.7 billion in assets for the rest of the year at this rate.
And What About That Debt?
All of this cost cutting and asset sales has meant one thing: Chesapeake Energy is finally making good on its debts. Back in January, Chesapeake managed to pay off all of its 3.25% senior notes before they were due this March.
Meanwhile, Chesapeake has taken advantage of its distressed situation and has been buying its debt at a discount. CHK was able to remove nearly $282 million in IOUs at an average of a 39% discount to par.
As of the end of the quarter, Chesapeake Energy’s debt principal balance was down to just $9.4 billion including roughly $360 on its revolving credit line. That’s a pretty good improvement on where it has been. CHK ended 2015 with debts of more than $9.7 billion, which did not include its revolver. This time last year, Chesapeake’s debts were over $11.5 billion. And at one time, the company’s total debt was north of $20 billion!
Everything You Could Want for CHK Stock
With the latest quarter in the books, investors in CHK stock have to be smiling.
On the surface, Chesapeake seems to be finally winning the war with its debts. Capex costs are falling, production is rising and asset sales are playing a role.
The name of the game for Chesapeake Energy continues to be “kick the can” long enough until oil and natural gas rebound. So far, it has been able to do just that.
Is CHK stock still a risky energy play? Yes, but the risks of a breakdown are dwindling every day.
Chesapeake Energy might finally be righting the ship.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
