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Why 2018 Was a Year to Forget for Chesapeake Energy

Matthew DiLallo, The Motley Fool

Last year was another brutal one for investors in Chesapeake Energy (NYSE: CHK). While shares of the oil and gas producer were up more than 35% at one point, the stock lost 47% of its value overall after getting clobbered the final three months of the year due to plunging oil prices and a high-cost acquisition, which proved to be ill-timed. Those are just some of the reasons why last year is one that Chesapeake investors will want to forget quickly.

Another year of transition

Chesapeake Energy spent much of last year working to chip away at its massive debt load, which stood at roughly $10 billion to start 2018. The company made several small deals during the first half of the year, closing $387 million of noncore property sales and a small stake in oilfield service company FTS International for $74 million in the first quarter, and then another $60 million in noncore properties during the second quarter. It then made its largest asset sale in the third quarter when it sold its entire position in the Utica Shale for nearly $2 billion.

A man with his head on a desk with a stock chart behind him that went up and then down.

Image source: Getty Images.

That last deal, however, didn't move the needle as much as investors would have hoped since the company sold its Utica assets for what analysts viewed as below market value. Because of that, the sale didn't put much of a dent in the company's leverage ratio, which remained uncomfortably high at more than 4 times debt-to-EBITDA. Further, while the company applied the entire proceeds from that transaction to repay debt, its total debt reduction for the year was only $1.8 billion, as it outspent cash flow in growing production once again.

The company further infuriated investors in late October when it agreed to buy Eagle Ford shale-focused oil driller WildHorse Resource Development (NYSE: WRD) for nearly $4 billion in cash and stock. The company paid a high price for WildHorse Resource as the deal will significantly dilute ownership of the company's shareholders. The company believes the premium price was worth it because WildHorse will help accelerate Chesapeake's strategic plan to grow its oil production while reducing its leverage ratio. However, oil prices need to cooperate for that deal to pay off, which is worrisome given that crude prices plunged to end the year. As a result, Chesapeake might fall short of its target to get its leverage ratio down to 2.8 times debt-to-EBITDA by 2020.

One thing worth remembering from 2018

While last year was one that Chesapeake's investors will largely want to forget, it wasn't a complete disaster. One of the highlights was the company's operations in the Powder River Basin. That region emerged as a new growth engine for the company as output rocketed from 18,000 barrels of oil equivalent per day (BOE/D) during the fourth quarter of 2017 up to 38,500 BOE/D by the end of 2018.

That region will likely remain a key growth driver for the company in 2019. Overall, Chesapeake expects its output in the Basin to more than double in the coming year. That's noteworthy since the company is tapping on the brakes and slowing its overall drilling activities in 2019 due to the recent slump in oil prices.

However, the upcoming addition of WildHorse Resources will likely cause the Eagle Ford Shale to re-emerge as Chesapeake Energy's main growth driver. The company needs that deal to pay off, and could cut its activity level in the Powder River Basin in favor of maintaining it in Eagle Ford if it needs to reduce spending further should oil prices remain weak.

2019 could be another volatile year

On the one hand, 2018 was a transformational year for Chesapeake Energy since it reduced its total debt by 18% while adding a new growth engine that could accelerate its strategic plan. However, the company paid a high cost for that accelerant, which might not pay off if oil prices don't improve. Consequently, the company's stock could bounce wildly again in 2019, soaring if crude rises and crashing if it falls, which is why this oil stock isn't for the faint of heart.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.