Why Chesapeake reported a solid 3Q13 but dropped almost 8% (Part 6 of 6)
Chesapeake stock drops
Despite reporting earnings that were largely in line with or better than company guidance, Chesapeake stock dropped steeply during the following trading session. Two potential drivers of this fall may be lower fourth quarter oil production or over-optimistic investor expectations.
Fourth quarter oil production expected to drop from third quarter
Management disclosed on the call that even with higher guidance for 2013 oil production, given how much oil the company had produced year-to-date, that still implied oil production in 4Q13 would drop by 9,000 barrels per day below 3Q13. The company stated that one of the factors behind this was “accelerated inventory reduction” (faster drilling of undrilled wells) during 2Q13 in the Eagle Ford, which added to 3Q13 production. The company noted that it would drill and produce at a “more normal run rate” in the fourth quarter. Another factor was that 3Q13 included the benefit of production from some assets that were sold later in the quarter. The market and investors may not like that oil production is expected to decrease sequentially.
Investor expectations may have been too high
Though Chesapeake may have met or exceeded the guidance it had put out publicly to the market, investors may have been overly optimistic. Over the past year, Chesapeake has been going through many changes that investors have viewed as setting a positive tone. The company has taken on new management, which the market largely views as more disciplined. This has resulted in less-aggressive capital expenditure programs and a refocus on generating investor returns instead of “empire building,” which is how many investors viewed the strategy of the former leadership. Given this strategic shift, Chesapeake stock has been on a bullish streak. It announced in January that the former CEO, Aubrey McClendon, would leave Chesapeake. At that time, the stock was trading around $18 per share, and since then, the stock has traded up to as high as $28 per share (currently at ~$26 per share). Meanwhile, however, commodity prices have been largely rangebound.
If investors expected blowout earnings or big announcements this quarter, they may have been disappointed by the lack of news. The company reported largely in-line results, with positive messages about future periods but nothing spectacularly of note.
Browse this series on Market Realist:
- Part 1 - Must-know: Chesapeake stock sells off despite meeting guidance
- Part 2 - 1 key guidance change that should be positive for CHK’s revenues
- Part 3 - Why did Chesapeake’s 3Q13 spending come in under budget?
- Finance Trading