Chesapeake Energy Corporation (CHK) Stock Hits Headwind After Getting Over the Hump

Advertisement

Will oil and gas giant Chesapeake Energy Corporation (NYSE:CHK) ever actually turn an annual profit again? The last time it’s seen any positive net income for a full-year stretch was 2014, and that was a “just barely” situation.

Chesapeake Energy Corporation

If you take a closer look at the quarterly earnings trend, though, you’ll notice something unusual about its first quarter of the year… the bottom line wasn’t printed in red ink.

One quarter doesn’t make a trend, to be sure, and there’s no doubt it was the rise in crude prices that drove the swing to profitability (price strength that has evaporated in the meantime). Nevertheless, for investors who had shelved CHK stock as a lost cause, it may be time to take it off the shelf and blow the dust off. This name offers some new hope.

No Longer on the Defensive

Just as a quick recap, Chesapeake Energy was hardly immune to the same illness that infected all other energy stocks when crude prices hit a wall in 2014.

In step with oil’s trip from $107 per barrel in mid-2014 to a low of less than $30 per barrel in 2016, CHK stock slid from $31 to less than $2 for the same time frame, while earnings tumbled from 2014’s profit of $1.3 billion to 2016’s loss of $4.9 billion.

CHK Results

Click to Enlarge

Brutal.

Yet, the first quarter’s profit of $75 million — on a 38% increase in revenue, no less — is a small glimmer of hope. As Wunderlich Securities analyst Irene Haas put it in front of the early-May report, Chesapeake Energy “should be near an inflection point for production and return to growth in the coming months.”

That was also the point in time when the market’s, and the company’s, focus shifted. SunTrust Robinson Humphrey analyst Neal Dingmann suggested that conference will “focus on the operations side” of the company’s business, as opposed all the divestitures that helped keep the organization afloat in the midst of oil’s rout.

The pair of analysts may have known what they were talking about. It was only late last month Chesapeake CEO Robert Lawler commented on the company’s Eagle Ford property at a JPMorgan energy conference :

“We anticipate to spot about 180 wells this year in turn – in line almost the same number. This is our oil production growth engine, the EBITDA engine for the company. This asset is very, very strong and relatively undeveloped. We estimated present that we drilled about 27% of the opportunities, represented in the Lower Eagle Ford, Upper Eagle Ford and in the Austin Chalk. We’ve greater than 2 billion of barrels of net resource potential here and with that current 185 wells drilled a year, about 25 years of activity.”

Take it with a grain of salt, of course. It’s unlikely a CEO would be anything but optimistic about the company he leads. Yet, it’s not a difficult assessment to get behind if crude and natural gas prices firm up.

That’s a big “if,” though, and the outlook isn’t encouraging.

Unfortunate Timing for Chesapeake Energy

Calling a spade a spade, the wave of divestitures Chesapeake worked, achieving the goal of supplying much-needed liquidity during some lean times. Those lean times also forced Chesapeake Energy to learn how to operate on a shoestring.

If the United States’ Energy Information Administration’s outlook is to be believed, though, the turnaround effort just hit a wall after the company got over its hump. West Texas Intermediate (WTI) prices are only expected to rise from $45 per barrel now to about $51 by late 2018. Natural gas prices are only projected to move from their current $2.98/Btu to $3.66/Btu by late 2018.

Natural gas outlook

Click to Enlarge

West Texas intermediate outlook

Click to Enlarge

That’s not a lot of growth.

As for where that leaves Chesapeake Energy (and by extension, CHK stock), the answer is between a rock and a hard place. The energy outfit can, more or less, turn a profit at those prices, but won’t thrive in such an environment. Eagle Ford holds a lot of energy, but it’s not going to be extracted cheaply.

Liquidity isn’t a concern either way. Dingmann and Haas were both right in that regard — it’s all about the operation now. Unfortunately, there’s only so much more operational efficiency Lawler can add that hasn’t been added already. From here, better gas and oil prices are going to the driver of any growth, or lack thereof.

Bottom Line for CHK Stock

Never say never. The EIA could well be wrong about its forecasts, which are updated on a regular basis.

As it stands now, though, observers aren’t especially hopeful. Last week’s natural gas stockpile report indicated more of a buildup than expected, and thus far, neither the U.S. nor OPEC have exercised the production discipline that would eat away at the global oil glut — at least not enough to matter.

Goldman Sachs thinks crude could slide back to less than $40/barrel in the foreseeable future, with analyst Damien Courvalin conceding that “the market is now out of patience” when it comes to trying to find a palatable supply/demand balance.

It bodes poorly for CHK, which was on the precipice of a real turnaround. In the current environment, it’s difficult to see the company doing any better than barely breaking even.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/chesapeake-energy-corporation-chk-stock-hits-headwind-after-getting-over-hump/.

©2024 InvestorPlace Media, LLC