Chesapeake Energy (NYSE:CHK), the darling of the early decade fracking boom, is still alive with $70-per-barrel of oil, but the pulse is weak.
The company said it had adjusted net income of $139 million, 15-cents-per-share, on $2.25 billion in revenue for its second quarter, after pumping the equivalent of 530,000 barrels per day of oil and gas, 90,000 of it crude oil.
It got an average price of $57.16-per-barrel for the oil, up from $51.65-per-barrel a year ago,, beating the consensus earnings estimate of 14-cents-per-share, but falling short of the “whisper number” of 17-cents-per-share.
The result disappointed CHK stock investors, who sent the stock crashing by 6% in pre-market trading, a loss of 29-cents-per-share.
CHK Stock: Asset Sales Continuing
What management wanted to discuss was its collecting $2 billion by selling its assets in the Utica Shale, an Ohio natural gas play, to Encino Acquisition Partners, uniting Canada’s CPPIB Pension Board and Encino Energy.
The deal closes in the fourth quarter and it will be used to retire debt that stood at $9.24 billion at the end of the quarter, down from $9.92 billion a year ago. But it will also cost the company about 10% of current oil production, which it hopes to make up in the Powder River Basin, an oil play in Wyoming and Montana where it is eager to expand operations.
During the most recent quarter Chesapeake got two-thirds of its oil, at an average price of $70.51-per-barrel, from the Eagle Ford in South Texas, and under one-tenth of its oil from the Powder River Basin, for which it got $67.37-per-barrel. But the Powder River play is much richer in oil, which fetches good prices, than it is in natural gas, which is where the Utica shines.
Dead Men Drilling
The continuing financial difficulties reflected in the report, and the continuing asset sales needed to offer relief, are why some call companies like Chesapeake “dead men drilling.” They continue to produce enough revenue to stay alive, and to pay down debt, but not enough to deliver much hope to shareholders.
Some investors continue to claim the company’s Eagle Ford and related Austin Chalk assets could produce more cash than the company has debt, if they’re sold, leaving a profitable if smaller company.
However, CHK is acting more slowly against the debt, which stood at $13 billion at its peak in 2014. It was still at over $10 billion when founder Aubrey McClendon died in a one-car accident, one day after being indicted for rigging bids for leases in Oklahoma back in 2016. McClendon, one of the big names in the fracking boom early in the decade, owned the Oklahoma City Thunder basketball team in the NBA, and its arena still carries the company’s name.
The Bottom Line
It’s said there are five stages to fame. Who’s that, get me them, get me someone like them, get me a young them and, finally, who’s that?
CHK stock is nearing that fifth stage of fame. Hardly anyone is writing about the latest quarterly earnings release. Only two of the 25 analysts said to be following CHK stock have it as a buy, while six say sell, and their price targets for the stock hover between $2 and $6-per-share.
If you’re looking to play in the oil patch today, your best bet may be to play with debt, not equity. That’s where the gains have been.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, did not hold a position in any of the aforementioned securities.
