Higher energy prices meant a big gain for Chesapeake Energy Corporation (NYSE:CHK) in the first quarter, and CHK stock responded by rising in pre-market trading.
Traders had been expecting good news, taking the shares 4.14% higher on May 3, but earnings of $75 million, 8 cents per share, on revenue of $2.75 million sent them up again when the numbers came out.
The per-share gain would have approached the “whisper number” of 20 cents per share in earnings, except the company has increased its share count dramatically, to 907 million from 668 million a year earlier.
The solid quarter, however, let Chesapeake Energy do some needed repairs to its balance sheet, dropping debt from $9.98 billion to $9.1 billion.
Cleaner Earnings for CHK Stock
InvestorPlace contributor Vince Martin had suggested that “cleaner earnings” could set up Chesapeake Energy for a rally and he was right, but the company’s glory days under the late CEO Aubrey McClendon are still far away.
CHK stock is taking a big hit in early morning trading. The current price of $5.15 is much different than when shares were at $30 stock in 2014, at the height of the oil boom. Still the higher prices of the first quarter, and what the company’s report called “hedging gains,” still meant the company could deliver relatively good news despite falling production.
Chesapeake Energy said it is currently operating 19 drilling rigs and will have an average of 17 in the field during 2017, with seven of those rigs in the Eagle Ford Shale of Texas, where production was down substantially in the first quarter.
Martin termed the first quarter “quiet” and that is in line with the views of other analysts, who are now counseling patience from investors. Patience is easy to find if you got into CHK stock in March, when it was selling below $5 per share. It may be lost if you bought your shares last October, at $8, or are still holding on from the 2014 peaks.
As its first-quarter results show, Chesapeake Energy is still highly leveraged to the volatile prices of oil and natural gas. While prices firmed early in the year, they are well off those peaks now, meaning the stock’s financial recovery, and thus its price recovery, may be short-lived.
The initial trading reaction to Chesapeake’s numbers was a 4.6% pop in CHK stock around 7:00 a.m., but these second thoughts cut the gain to a loss of more than 7%.
An Inflection Point for Chesapeake Energy?
Those who follow CHK stock are pleased with the quarter’s progress in reducing the debt load, but the lower production numbers could mean trouble ahead as the company continues trying to sell assets. The shares got a big boost from the 2016 election, rising 45% in a month, but those gains disappeared in early March and the stock today is right about where it was Nov. 8.
As InvestorPlace contributor Richard Saintvilus wrote recently, there are still a lot of “ifs” in the Chesapeake Energy investment case. The company needs higher prices to reduce debt and make its assets attractive, and with West Texas Intermediate crude oil currently trading at $47.26 per barrel, down from $54 less than one month ago, permanent relief is not in sight.
The bottom line is that Chesapeake Energy had a good quarter, but it remains hostage to oil prices. It declared its Wyoming production in the Powder River Basin profitable last month, but that was at higher prices than are currently available.
If you wish to tie yourself to the mast of oil prices, you’re going to remain interested in CHK stock, but right now the investment is going nowhere fast.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.