Chesapeake (NYSE:CHK) releases earnings Thursday, so let's dust off the model from last quarter and get some new predictions carved in digital stone. I encourage you to download the model at Excel-Data-Junkies.com Here, plug in your own assumptions, and follow along. We can discuss further in the comments.
For a refresher, you may recall that my general thesis was that despite a valiant effort, I did not think oil and gas prices would rise quickly enough to save Chesapeake from a default in the second half of 2017. When I wrote that in early May, natural gas was trading at about $2.00, oil was about $45, and CHK stock was gyrating wildly, but in the ballpark of $5.00. While the common stock price is about the same, a lot has changed since May. Most importantly for CHK, natural gas has rallied about 37%, closing recently over around $2.75. Oil zoomed past $50, before recently falling back to $40. In other news, CHK exchanged about 87 million shares of equity for $444M of debt.
So let's plug in the changes and see what the model spits out.
Natural Gas Revenues:
First off, we need to estimate volumes. 1Q natural gas volumes came in at 276 BCF. Due to asset sales, depletion, and decreased capital spend, I'm going to assume a 4% decline down to 265 BCF for the quarter. That's not a certainty, since I can't be sure of the actual timing of the divestitures, but it shouldn't be too far off. For future quarters, I just assume a steady decline through the end of 2017.
For price, the Henry Hub average for the quarter was $2.15, and I assume they received a $0.15 discount, realizing $2.00 at the wellhead. For hedges, I assume 65% of production was hedged at $2.70, and back into a $95M gain on derivatives. This gets us to quarterly natural gas revenue of $619M including derivative gains. For future months, I assume gas rises to $3.25 in 2017 with a wellhead discount of $0.25 and $25M a quarter of derivative gains, but am hoping they give us some more guidance in the call.
Q1 Oil volumes came in at 8.7 million, so I have forecasted moderate declines going forward due to asset sales and reduced capital spending. WTI Prices averaged $45.46, and I assume about a $3.00 discount at the wellhead. I don't have a good feel for derivative gains/losses, but have put in a $15M/quarter assumption going forward. Whatever it is, I wouldn't expect it to be particularly large either way for Q2. This puts total oil revenues including derivatives at $376M for Q2
For NGL's, I have volumes down a bit, and price up a little, with no hedging gains or losses.
Adding it all up, I have hydrocarbon revenues up about 9% over last quarter as higher prices were somewhat offset by lower hedging gains and lower volumes. For the Marketing, Gathering, and Compression unit, while they make up about 50% of total revenue, this is essentially a flow through breakeven unit financially. I have estimated revenue at $1.10B and cost at $1.07B, so the EPS and cash flow impact is immaterial in the big picture. I have total revenue at $2.2B which is higher than the consensus, but it is what it is. Feel free to plug your own assumptions of price and volume into the model and see what you come up with.
Operating Expenses/Net Income:
For modeling operating costs, I use a much simpler process…basically eyeball the historicals, and generally assume costs are coming down due to divestitures, efficiency, and vendor pricing. For "Marketing Gathering, and Compression", I assume costs are 97% of revenue. I purposely pulled out impairments this time around because I have no skill in that. It is very possible they do post another large impairment, as the 12 month average commodity price declined despite a quarter end ramp. After adjusting for shares issued, and assuming no impairments, I get an $0.11 loss per share for the quarter.
CHK ended Q1 with $16M cash in the bank and had to lean on its $4B line of credit to fill the gap as cash from operations was $-421M and CAPEX was $342M. For Q2, I have Cash from Operations at +$165M, CAPEX Lower at $300M, and $450M of cash inflows from previously announced asset sales. This category was a miss for me last quarter, so it will be interesting to see how many deals actually closed in Q2, and what slips into the second half of the year. The Q2 debt for equity swaps technically didn't involve cash, but I have them in here as an offsetting $444M stock issue and debt repayment. At the end of the quarter, I have cash back up to $281M with a few big assumptions being that they close some of the announced asset sales and that there is no material movement in payables or receivables like there was last quarter.
Put it all together and we have revenue at $2.2B, EPS at -$0.11 per share without impairments, and hopefully a $265M cash build, assuming they close $450M of previously announced asset sales.
On balance, Chesapeake is in a better place than it was back in May thanks to the debt for equity swaps and much improved natural gas prices. However, they are far from out of the woods. At today's prices, $40 oil and $2.75 gas, I think Chesapeake is still cash flow negative, and getting weaker every day. Chesapeake's fate is highly dependent on the price movement of oil and gas over the next 12 months. I'm the first to admit that my record at predicting oil and gas prices is as bad as anyone else's, so open up the excel model and plug in your own forecast through the end of 2017. If gas is at $4 next summer and oil is at $60, management shouldn't have any trouble when their line of credit is re-evaluated in the second half of 2017. Not so long ago, I would have thought that was a sure thing, but today, I'm not so sure.
Earnings will be released before market open on Thursday 8/4/2016. I am looking forward to discussing your projections for Q2-2016 and beyond in the comments. After earnings, I will update the model with actuals and re-forecast Q3-2016 forward.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.