Every quarter is important for Chesapeake Energy Corporation (NYSE:CHK). But this one seems particularly important for the beleaguered energy producer. The Chesapeake Energy earnings report will need to prove a lot this upcoming Thursday because everyone has basically abandoned the company and given up on CHK stock once again.
The abandonment started with its major cheerleader Carl Icahn. Icahn made a massive reduction to his stake in the company and cut his ties to Chesapeake’s board. This kicked off a wave of selling and now CHK stock has been basically cut in half since hitting recent peaks over the summer. Investors have simply flown the coop at the fracker
Given that Chesapeake Energy has moved back into the “hated” category, this earnings report could be the one that either propels the stock forward or pushes it into the abyss.
The Headline Number for CHK Stock Will Be Ugly
There’s no secret that the oil and natural gas rout is still having its effect on the energy sector. Heck, even giant Exxon Mobil Corporation (NYSE:XOM) is still struggling. And while prices for energy have become firm recently, they actually spent much of the last three months slightly lower than the second quarter of the year. Without any mid- or downstream assets, Chesapeake Energy is strictly tied to energy production.
With analysts estimating that CHK will realize lower selling prices for natural gas and crude oil, profits are going to still stink. In fact, Chesapeake Energy isn’t going to have any profits at all. CHK is estimated to lose 4 cents per share when it reports. Likewise, revenues are going to suffer some pretty nasty declines as asset sales will remove plenty of production from its bottom line.
Realistically, Chesapeake really doesn’t have a chance when it reports. But that’s only if you focus on the headline number.
Digging Deeper at Chesapeake Energy
We all know that Chesapeake is suffering hard. But the real key is whether it is suffering less than it did the previous quarter. Buying CHK stock isn’t about owning a steady-eddy blue chip. It’s about a turnaround play. And under that guise, the energy stock may just give investors what they want.
For starters, that 4-cent loss is actually an improvement on the 14-cent-per-share loss recorded during the second quarter — even with lower revenues and energy prices. The reason has been CHK’s call to improve its margins, reduce CAPEX and focus on low-cost drilling regions.
Already, Chesapeake has improved its margins through long lateral drilling in oil-rich areas such as the Eagle Ford. This focus should help CHK realize a 12% jump in margins per barrel. More importantly, those margins should improve as it looks to use long lateral drilling at other prolific fields it owns acreage in. In the end, it’ll help better Chesapeake Energy’s bottom line down the road.
Secondly, CHK’s real story has been about its debt and the removal of that debt. As it grew into one of the largest natural gas energy stocks, Chesapeake Energy took on a lot of debt. As energy prices crashed, that debt became an albatross around its neck. Since former CEO and founder Audrey McClendon’s ouster, CHK has spent the last few years reducing that debt by more than 50%, which is an impressive feat considering it started with north of $20 billion in debt.
Chesapeake Energy has continued to buy back its debt, preferred stock and other credit facilities with vigor. That will only serve to pay down its interest expenses. And while it’ll have an impact this quarter, any additional buys announced during the earnings report will only serve to better things in the fourth quarter.
Finally, the good news at CHK comes down to cash flows. Already Chesapeake Energy has seen some improvements on this front and now management sees CHK becoming cash flow neutral by the beginning of 2018. However, that assessment doesn’t factor in rising energy prices. Incidentally, rising energy prices will only cause profits to rise that much faster now that Chesapeake Energy has worked to improve its margins, drilling locations and debt costs.
Things Are Getting Better at CHK
In the end, things are improving at Chesapeake Energy. Since starting the turnaround, the firm has managed to improve on many of the metrics that needed to make CHK stock a viable energy producer far into the future. However, Wall Street may not notice these improvements when it reports earnings. Remember, that headline number is going to stink. The key is to look past that number and dig a bit deeper.
If the energy firm manages to deliver on reducing debt, boosting margins and strengthening its cash flows, then CHK stock could find a place in risk seekers portfolio. There is still a lot of risk at Chesapeake Energy. But with its upcoming earnings report, we’ll see if those risks are reduced.
The Bottom Line: CHK is going to have to prove a lot this upcoming Thursday.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
