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Chesapeake (CHK) Down 18.1% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Chesapeake Energy (CHK). Shares have lost about 18.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Chesapeake due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Chesapeake’s Q3 Earnings Miss Estimates, DeclineY/Y

Chesapeake reported third-quarter 2019 loss per share (excluding special items) of 11 cents, wider than the Zacks Consensus Estimate of a loss of 10 cents. The bottom line was also wider than the year-ago loss of a penny per share.

Operating revenues amounted to $1,170 million, down from $1,199 million in the year-ago quarter. However, the top line beat the Zacks Consensus Estimate of $1,162 million.

The weak earnings stemmed from lower natural gas production volumes, decline in realized commodity prices and higher average production expenses. The negatives were partially offset by higher quarterly oil volumes and lower gathering, processing, and transportation expenses.

Operational Performance

Total Production Declines

Chesapeake’s production in the reported quarter was approximately 44 million barrels of oil equivalent (MMBoe), down from 49.4 MMBoe a year ago. The total production comprised 10 million barrels (MMbbls) of oil (up 11.1% year over year), 183 billion cubic feet of natural gas (down 14.9%) and 3 MMbbls of natural gas liquids or NGLs (down 40%).

Importantly, daily oil production of 115 MBbl during the September quarter was higher than the year-ago level of 89 MBbl, supported by rising output from the Brazos Valley.

Price Realizations Plunge

Oil equivalent realized price — exclusive of gains (losses) on derivatives — was $22.79 per barrel, decreasing from $26.92 in the year-ago quarter. Oil price was $58.18 per barrel, decreasing from $72.39 in the year-ago quarter. Moreover, natural gas prices declined to $1.93 per thousand cubic feet from the year-ago level of $2.69. Average sales price of NGLs was recorded at $12.44 per barrel in the quarter compared with $29.09 a year ago.

Operating Expenses

Total operating costs in the third quarter declined to $2,041 million from $2,342 million in the prior-year period. However, quarterly production expenses per Boe increased to $3.54 from $2.68 in the year-ago period.

Capital Expenditure

Total capital expenditure increased to $640 million in the third quarter from $551 million in the year-ago period, primarily due to a rise in initial drilling and completion capital spending.

Balance Sheet

At the end of the quarter under review, Chesapeake had a cash balance of $14 million. Net long-term debt was $9,133 million, leading to a debt-to-capitalization ratio of 65.9%.

Guidance

The company reiterated its production guidance for 2019 in the range of 484,000-505,000 Boe per day. It expects production expense for 2019 in the range of $3.20-$3.40 per Boe.

Notably, the company maintained its total capital budget for 2019 at $2,105-$2,305 million.

For 2020, the company expects oil production to remain flat with 2019. It also plans to slash 2020 capital expenditure by 30%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month. The consensus estimate has shifted 20% due to these changes.

VGM Scores

Currently, Chesapeake has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Chesapeake has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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