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Chesapeake, Spend Less

Callum Turcan profile picture
Callum Turcan


  • Why Chesapeake Energy Corporation's stock price got clobbered after its earnings.
  • Chesapeake needs to spend way less on capex.
  • How Chesapeake can at least try to fix its biggest flaw.
  • The company has a chance, a very slim one.

I'm going to start off going over what I see as Chesapeake Energy Corporation's (NYSE:NASDAQ:CHK) biggest flaw (and most irritating as a shareholder and/or future bag-holder), then I'll go into how that can be remedied. One of the biggest reasons Chesapeake Energy Corporation tanked after reporting its Q3 earnings is that it appears management still doesn't get it. Chesapeake Energy Corporation, spend less!

Weighing the cash flow versus capex situation

When the company first issued out 2017 guidance back in February, the goal was to spend between $1.9 billion-$2.5 billion, inclusive of $200 million in capitalized interest (the rest of its interest expense shows up on its income statement) on capital expenditures. A sharp jump from $1.697 billion spent on capex in 2016, justified (in theory) by the need to offset production declines across its portfolio due to subdued completion activity last year.

The low end of that budget would have still put Chesapeake on a favorable trajectory heading into 2018 as its production base would have stabilized around the middle of this year. If growth was a concern, Chesapeake could have allocated more to the Eagle Ford and less to the Powder River Basin (the Eagle Ford is its liquids growth engine, the PRB is a monetization opportunity).

Now Chesapeake aims to spend between $2.3 billion-$2.5 billion on capex this year, a bump up from $2.1 billion-$2.5 billion previously. A level that vastly outstrips the company's operating cash flow generation and compounds existing problems.

Chesapeake generated $337 million in operating cash flow in Q3 ($331 million including working capital changes), nowhere close to its capex of $692 million. An adjusted EBITDA figure of $468 million was touted, but that excludes Chesapeake's net (includes favorable hedging impact of $1 million) interest expense of $114 million for the quarter (different from capitalized interest, which shows up on its cash flow statement under acquisitions of

This article was written by

Callum Turcan profile picture
Worked as an equity analyst for several years in the USA and have been writing financial articles and analyzing publicly traded companies for more than a decade.

Analyst’s Disclosure: I am/we are long CHK. 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.

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