Let’s face facts: Even with the recent rise in crude oil and natural gas prices, the energy sector is still hurting pretty bad. Even giants like Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) are hurting. So no one expected former shale superstar Chesapeake Energy Corporation (NYSE:CHK) to knock it out of the park this quarter.
It didn’t. While CHK continued to bleed money, that may not matter.
The name of the game for Chesapeake has always been about reducing that crazy high debt load to live and fight another day.
With its latest earnings release, Chesapeake announced some new moves to make it leaner and more profitable, capable of surviving the low-price oil rout.
The unrelenting losses are troubling, sure … but they aren’t the defining factor for CHK and its turnaround. For investors, that’s the key for CHK stock.
Chesapeake Earnings: Another Loss
On the surface, CHK earnings were hard to look at. Revenues declined by 54% year-over-year, translating to a bottom-line loss of $2.48 per share. Lower oil and natural gas prices, poor derivative bets and impairment charges hindered both results. This was now the sixth consecutive quarter of losses for the former shale superstar.
Like we said: Bad with a capital B.
Dig deeper, however, and you can catch a glimpse of Chesapeake’s turnaround. For one, debt and costs have gone down continuously.
Debt has been the issue at CHK ever since former CEO Aubrey McClendon founded/left the company. When the energy environment changed for the worse, that huge debt load several hindered CHK and stymied the firm’s prospects. The last few years have all been about reversing that huge problem. And it looks like it’s significantly making headway on that front.
At the beginning of the year, CHK managed to do a few debt-for-equity swaps as well retire several tranches of senior notes. Those efforts continued this quarter and Chesapeake managed to remove more than a $1 billion in debt off its balance sheet. Now Chesapeake’s long-term debt stands at just $8.7 billion. While that sounds still like a lot, it’s approximately $3 billion less than what the company owed this time last year.
Meanwhile, CHK continues to reduce capex and drilling costs. CHK’s moves to reduce drilling times and other issues helped the energy stock realize a 25% year-over-year decrease in costs and 2% decline from the costs in the first quarter of this year. That’s helped boost operating cash flows, which in turn reduced debt. Chesapeake estimates that cost cutting will free up as much as $1.8 billion in extra cash flows.
Finally, CHK’s production mix has continued to shift toward more oil. Even with prices down low, oil is still more profitable than natural gas. This is certainly helping on the firm’s operating cash flow fronts.
That’s great news for the company: Reducing debt and costs is just what CHK shareholders demand, and Chesapeake’s executives should keep this gravy train rolling for the rest of the year.
That’s because Chesapeake has announced more asset sales to help boost its cash hoard and reduce debt. CHK is now looking to sell roughly $2 billion in assets this year — that’s up from the prior range of $1.2 billion to $1.7 billion. On the chopping block will be selected Haynesville Shale acreage. The Haynesville is located in northwest Louisiana and is a hotbed of low-cost natural gas activity. CHK should be able to get a lot of interest from this acreage.
The sale will help fund drilling and continue go into reducing that debt load. And Chesapeake still has more things it could sell to make itself a leaner, more profitable operator.
Bottom Line: CHK Stock Is Still a Gamble
No bones about it, CHK is still a risky stock to own. There’s plenty of things that need to go right for Chesapeake for it really thrive over the longer term. That said, it seems like it’s becoming less risky every quarter.
Yes, the continued losses hurt, but the real risk to the firm’s shares (bankruptcy) seem to be abating. There’s less debt on its books, costs are falling and operating cash flows continue to drive the first two items. Add in the asset sales and you have a slightly rosier picture for CHK.
Just looking at the headline number, CHK appears in a sad state. Chesapeake, for its part, is making progress on its turnaround. For those willing to make a play on the firm, that’s all you can really ask for these days.
Just get through until natural gas and oil finally rebound.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.