Entering text into the input field will update the search result below

Chesapeake: Still No Cash Flow Neutrality

Aug. 01, 2018 5:54 PM ETChesapeake Energy Corporation (CHK)47 Comments


  • Chesapeake posted results which might be in line with expectations, yet adjusted profits are not very strong.
  • This observation follows the realisation that adjusted earnings are not sufficient to finance net capital investments, driven by artificially lowered depreciation charges.
  • The lack of realistic earnings power and modest sales price of last week´s divestment makes that I continue to be cautious on Chesapeake, finding it too early to see appeal.
  • Members of my private investing community, Value In Corporate Events, receive real-time trade alerts on this idea and many more. Learn more today >>

Chesapeake Energy (NASDAQ:CHK) cannot seem to create sustained positive momentum for its investors, despite "adjusted" profits and delivering on a big divestment last week. I have reviewed the divestment over the past weekend already as the deal did little to provide real comfort to me, given that the deal involved the sale of about a fifth of current production, while cutting debt by a similar percentage amount.

This reason and the fact that adjusted earnings are both down sequentially and on an annual basis is bad enough as it is, as my concern is that net debt continues to creep up from normal operations as capital spending surpasses even the sum of adjusted earnings and depressed depreciation charges. This all still warrants a cautious view in my eyes amidst a lower production profile and soft current pricing.

The Earnings Release

After Chesapeake posted first quarter adjusted profits of $361 million, reported "adjusted" earnings fell to $139 million in Q2, being down from $205 million in the second quarter of last year. Reported GAAP losses totalled $40 million with this discrepancy largely related to impairment charges and hedge losses.

The big issue which I have is with the adjustments, as adjusted earnings come nowhere actual cash flows, due to the fact that past large impairment charges artificially lower depreciation charges. While this is good for the P&L, it means that Chesapeake has to continue to make net capital investments in order to maintain production.

Capital spending totalled $595 million this quarter (including capitalised interest). Including a $290 million combined depreciation and amortisation charge, net capital spending totalled $305 million, more than twice the reported adjusted earnings. These investments allow production to rise by 0.4% on an annual basis to 530,000 barrels of oil-equivalent per day, hardly a great improvement.

This is

Please subscribe to Value In Corporate Events - Marketplace Checkout to obtain premium research on all the latest IPOs, M&A activity and other corporate events. Reviews of situations will be made upon request!

This article was written by

The Value Investor profile picture
The writer is a long term value investor and M.Sc graduate in Financial Markets with over 10 years experience. Value can be found in both long and short ideas and uses options to enhance the risk-return profile of investment ideas. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (47)

Neil B profile picture
It's hard for me to see Chesapeake Energy as an investment. Using a current price of $4.45,the stock has declined 85% from its five-year high of $29.60 on June 23, 2014. It has declined 44.7% from its two-year high of $8.05 on September 12, 2016. Most recently, it has declined 17.6% from its high of $5.40 on July 10, 2018. The results from the recent quarter keep talking about a better future. Based on its past history, the future has not proved to be a place in which to place trust or money. I see it is a short-term trade. I made a little money buying calls in May and selling them in June. Just my thoughts.
Gas stocks are down below 5 year average and this time last year. NG will head higher this year along with CHK.
ESP equity research profile picture
The Utica deal will be positive for CHK - they need lower net debt, and lower future capex, and interest expenses to go down - this deal accomplished all 3 of these...

The deal also makes CHK more oily, and less gassy - another positive IMHO...

westelk profile picture
Lawler told you on the earnings call he is probably going for more debt.

Lawler has previously said cash flow neutrality in 2017, then 2018, now 2019. Talk is cheap and when you continue over-promise and under-deliver credibility is lost.

Could CHK be a buy? Maybe, but I have to look at the footnotes in the latest 10-Q (that's where the dirt is hidden) before deciding.
Jim Cramer doesn't move the markets hahaha
shiprepair profile picture
Gas and OIl stock holders, Lets not panic for now, the major event will be happening very soon as reported today by the US forces. This be the last days until the Iranian Sanctions will be in force as off next Monday 2018.08.06.
"The IRGC will be holding major sea operations in the Persian Gulf within the next couple of days".
Oil tankers trading in and out of the Persian Gulf, since the major Iranian Naval Forces and IRGC are expected to start a major operation in the ME/PG.
The IRGC has assembled a fleet of fast small moving speedboats and other naval vessels and support material. Tanker traffic will be in jeopardy and outward & inward tanker ( and other maritime) traffic oil supplies can be halted. Insurance rates are to explode and crude oil and Gas supplies will be halted.
Oil and Gas prices will be exploding !!!
US Shale oil companies will see their stocks explode for a long period to come

Do you have a link to the source...?
shiprepair profile picture
Henne, Yes the source was written by CNN in yesterdays news and also today's news.
Many thanks!
i'm pleased to see management do what was necessary to get ebitda better in line with debt; not happy to see the production loss with the asset sale, but a pill of some sort needed to be swallowed with natgas pricing where it is.
as for flaring....imo, if the costs to collect and transport ng biproducts from oil-focus holes leaves little or no profit, diluting overall profitability excessively...file the necessary forms and burn baby burn. when profitable pricing returns...connect and earn baby earn.
I don’t understand why someone would expect cash flow neutrality this quarter. Lawler always stared that the goal was cash flow neutrality by 2019. The last time I checked my calendar this is 2018. CHK has a mountain of debt when he came on board plus a boatload of pipeline commitments. He has moved the company in the right direction on all of it. I have faith that he’ll make it there and I put my money where my mouth is. Long and patient as long as the goals are being met and the goalposts aren’t moved.
I remember when Amazon was criticized for burning cash quarter after quarter and year after year. That is what you do when you are growing. CHK has fixed all their problems and they are now on a growth path. PRB is as big a bonanza as the Permian with no takeaway problems.
LuvMyBonds profile picture
Jim, how many profitable quarters has AMZN had in their entire history? If I’m not mistaken they can be counted on one hand. I’m contrast, CHK is about the same age and how many profitable quarters have they had? I suppose it’s all about who you know, eh?

I’m very bullish and long.
Tedamerica profile picture
Im very bullish on Natural Gas. China is in the process switching from coal to nat gas as they have a terrible pollution problem. Trump is making sure Europe buys our nat gas and not Russia's. In the short term there is a lack of faith on many investors; This allows us to accumulate for the long term.
Robert Egloff profile picture
Couldn't agree more Ted.

Every single year - power generation by natural gas increases, while other sources stay near flat or decline.


Then consider electric cars.. The pie in the sky concept is that everyone will live in happy land with solar cells on everything. Of course, I looked into Solar power and I can't see spending $50K or more on a power source that still needs augmented from the grid on occasion. So that power for electric cars will come from the sources in the link above :)

That link is 2017 numbers - check out the future forecasts.

Page 14 on this PDF: www.eia.gov/...
ckarabin profile picture
Didn't they say that cap ex was stacked in the first half and that in pursuit of their full year target would be lower in the second half, thus allowing cash flow neutrality or even better?
DT Now profile picture
If anyone who has been as long as I have believes management is incompetent, then I'd like to hear what they would do differently instead of constantly whining. Lawler is the ONLY reason that CHK has turned the corner. I know it seems like an eternity for some of us - too many people want a instant gratification or a quick scalp these days - but I live by Warren Buffet's mantra: "I get paid to wait." As long as oil/gas prices stay at or above current prices, the shares will do well. Looking forward to Moody's upgrade, analyst upgrades, PA lawsuit settlement, and continued execution of a well-thought out strategic plan.
Tedamerica profile picture
Yep,,,im right there with you brother, adding tomorrow.
utilitiesdumb profile picture
D T Now, agree with everything you said. Now’s not the time to get off this horse. HOLD FAST!! Long for a number of years but Lawler is righting the ship.
You are getting paid to wait only if you hold debt or the preferred. As for the common, you are waiting to get paid.
georgefelix75 profile picture
Was I mistaken when I read Moody’s was reviewing credit rating for possible upgrade? Does that not effect the debt......
LuvMyBonds profile picture
Moody’s has them under review for a debt rating upgrade. More importantly, with a better rating CHK will be able to optimize their debt/equity ratio and reconfigure their capital structure.

This management team is performing magnificently.
Yes, but an upgrade is only to likely help them refinance debt at lower cost. A good thing (since they said they will refi some debt by end of year), but not a game changer. 25-50bps reduction in cost on a portion of their debt helps, but too-line growth (and how the cash filters to the bottom line) is what will really matter.
stag15 profile picture
Every bit helps when trying to turn a massive ship around. Lawler is doing the right things, just needs gas prices at $3...
Once the oil hedges roll off in 2019, they have less than half hedged at almost $60. They are increasing oil production by 10% at the same time. This alone could bring in 150mm per quarter. plus interest savings of 40mm per quarter when the Utica sale goes through.
Which, with increased capex, will still not solve the problem. Only higher gas prices will yield meaningful profit.
Did you notice how they lowered capex significantly yoy. Plus they are developing PRB right now which has a large upfront cost.
CHK is a becoming a cash machine, free cash will continue to improve. Stock to 8 by year end.
Cramer just slammed CHK again. Everyone has a right to their opinion, but he stated that we flare more natural gas than we use. WOW! Where the heck did he get that information from? That can't possibly be true, but it's just another indication of the narrative that has taken hold in the NG market.
Justy72727 profile picture
Thank you for this information TH8ADK! Was it on Mad Money? Last time Cramer said to avoid CHK, shares went up almost 100% in 2 weeks! I always do the opposite of what he says :)

Anyhow, he just likes to exaggerate his points. 0% chance we flare more than we use.
georgefelix75 profile picture
Cramer is the first to say he’s an entertainer on the show. That’s what he gets paid to do.
According to the EIA we produce 33 TCF per year and we flare and vent 0.22 TCF. That is less than 1%. Cramer was only off by 2 magnitudes. That is about average for him.

Rising oil prices have yet to positively affect CHK due to hedged oil. Reducing debt via divestment is still a positive even with reduced productivity. Guidance also stated majority of lost productivity will be made up by EOY. Overall it seems like a strong step in the right direction. It’s all how the story is spun!
They sure don’t but they will get there if prices rise. I’m not sure how they plan to pay down debt down the road.
Why did they sell the Utica? 19 percent of their production, sold to kiss the shareholder’s ass and they are still ungrateful.
The company had to make progress in paying down some debt -- the Utica transaction allows them to do that. It also takes away some interest costs and other liabilities - those are each huge for CHK.

The loss of production is a short term issue. CHK has great drilling options in other areas but a limited amount of CapEx with which to drill. They now have the ability to drill in these areas. An underappreciated positive in this is that ramping production in these green fields also makes those properties worth much more. The company can then sell them for big bucks if they wish to down the road.

CHK is now in a virtuous cycle and no longer in the vicious cycle. Long CHK
ESP equity research profile picture
The Utica sale will be a positive. Makes CHK less gassy, and the NG pricing in the Utica trades at a large discount to HH.

Because they were loosing money on the gas, 2.57 price vs 2.92 cost, and they have a chance to turn that around in Wy
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.