Chesapeake Energy: Running Out Of Options
Summary
- Chesapeake Energy is running out of options.
- The company continues to post real losses and flattish capital net capital spending does not allow for production growth.
- The outlook is dismal with nearly $10 billion standing in a senior position to the remaining half a billion which equity still represents.
- While short squeezes might still occur, the outlook is simply dismal, unless a dramatic move in oil prices comes to the rescue sometime soon.
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I have long been extremely cautious on Chesapeake Energy (NASDAQ:CHK) as only a boom in oil and gas prices could save equity holders in the company. Investors have been lured with positive adjusted EBITDA and adjusted net earnings metrics, which do not tell the entire picture, not being that rosy.
After all, production numbers should be seen in relation to asset acquisitions and divestments, yet the major concern is that depreciation charges have been distorted by large impairments in the past. Hence, the lowered depreciation expense seems to suggests that the business is profitable, or close to being profitable in a low pricing environment. The issue is that capital spending will surpass the reported depreciation expenses in such a scenario, even to just keep production numbers flattish.
That suggests that reported profits are made undone by capital spending surpassing depreciation expenses and hence results in negative cash flows, which, in combination with the low price environment, is the reason why the stock could not escape the current turmoil.
With the stock having been decimated, let's have a look at the latest results which could not provide any relief, albeit in a very difficult market condition.
The Numbers
Chesapeake reported a full-year GAAP loss of $416 million and an adjusted loss at a similar number of $454 million for the year 2019. The reported EBITDAX number came in at $2.53 billion, a modest improvement from last year.
Total production for the year came in at 484,000 barrels of oil-equivalent per day, down from 521,000 in the year before as oil production rose from 90,000 to 118,000 barrels, with the fourth-quarter oil production being relatively strong. While full-year oil prices were up a few percent compared to 2018, natural gas prices were down more than 10%.
With the company still reporting losses, both on a GAAP and adjusted basis, the outlook is concerning. For the year, the company reported nearly $2.3 billion in depreciation expenses, essentially similar to the $2.2 billion capital spending number. Hence, the reported losses closely mimic the cash flows of the business and this is concerning, as production is really not growing and at best is flattish, but in reality falls a bit.
With net debt still at $9.1 billion and the company having a large chunk of preferred equity as well, it is crucial for Chesapeake to make some money which it really is not doing at the moment. Furthermore, the net debt load is still enormous, and while it has come down in absolute levels, the production base has been falling as well, meaning that in relation to production levels, leverage is not really coming. This is because there are no earnings or cash flows to reduce leverage on an organic basis, absence of an unexpected jump in oil prices.
The 2020 outlook might seem comforting with capital spending set to fall from $2.2 billion to a range of $1.3-$1.6 billion. Assuming flattish D&A expenses at $2.3 billion, that could yield $700 million to a billion in cash flow, although the company loses about $400 million a year now as well in this environment. The issue is that with the fall in the capital spending budgets, oil production is set to come in flattish, with gas production set to fall as well in 2020, although this has not been quantified.
What Now?
With about a 1.7 billion share count trading at just $0.27 per share, the market value of the firm is approximately half a billion, which is just a rounding error given the net debt load of the company, let alone the enterprise value of the firm. The lack of options other than trying to stay alive on the lifeline of financiers and trying to sell assets is just buying time, as common equity holders seem to realize that no value might be left for them, unless something dramatic occurs.
Given all of this, the continued grinding lower of the shares does not seem unexpected at all to me. Note that unsecured bond prices, lower on priority compared to senior debt but ahead of common equity, have lost quite some value again as well during this rout.
Not even targeted asset sales or a reverse stock split might come as the magical solution, given the options the company has are dwindling by the day.
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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.
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Comments (101)
CHK is well hedged on oil for 2020 and NG will turn around by year end. It’s crazy but it just might save them,
warming will likely affect how much we drive....but ..there are vehicles being produced today
with good maintenance could last 25 years. I would like to add many of the other oil companies
have depressed share prices. Remember GE, would it be incorrect to say they are experiencing
a Lazarus moment. I might lose on CHK...but will wait for price improvement to reduce loss.
Will call the loss the price of my Tuition to trading school.
hedges won't save anyone
debt kills
and pay attention to the CHARTS, not the BS opinions of humans.
is not the same at $10 to 22 cents - can you see that or not?
Anyone who's on about bankruptcy as though it's impending is passing gas out of his/her mouth.
Ignore such voices" and let mgmt. do what they've been doing - getting the company back on track.
you just don't run to the courthouse on a Friday afternoon (WHEN IT HAPPENS)...it's like planning a party.You have to have enough cash to pull it off
you have to line up DEBTOR in possession loans (look at any recent chap 11 in most cases in the FILING is a naming of a new creditor that is snagged.)Then the brutal stuff comes - and they will be carrying out boxes out of the office on NW avenue - and maybe not shopping so much at Whole Paycheck so much. I feel for all the people that believed, but Aubrey made the dream based on $10 NG, not $3 (and your lucky to get 3 these days).BK must be a planned out play, lest you get pushed into liquidation, CHAP 7.The first to go are the common shareholders and obviously the leaking the higher ups do has caused the PANIC selling and they losers here will blame it on the shorts, but the shorts are a small part of the story. It's the big money that leaves, and leaves it has.If you don't understand history, your doomed to make your mistakes over and over again, and yes, if they do an RS, the shorts will jump on it again, because it's an opportunity, that's the markets and the risk any investor takes. You can bet on your stock to win or lose.
At these prices, NG production (supply) is being discontinued, except for the hedged production.
Nobody is going to produce to lose money - not even distressed companies.
Fortunately, CHK has its oil revenues to keep it going until the imbalance between supply and demand for NG is corrected. I suspect that when the demand-supply disparity becomes to obvious to ignore, the consequent price correction will be violent to the upside.
Demand is for NG is growing steadily - production is quickly being curtailed.
Soon enough, prices will rise abruptly.
And if CHK becomes cash-flow positive by the end of the year as they are attempting, what will you say then?
While that narrative has proved persuasive for some (famous "Mr. Market"), it's not really in accordance with recent history.
CHK's mgmt. has been EXTREMELY proactive in getting this company's house in order. Sure, there have been some questionable calls (e.g. the WildHorse acquisition) but for the most part Lawler and mgmt. have done a stellar job of righting that which was incredibly screwed up (and in FAR worse condition just a few years ago).
Those who are bearish on CHK stock would be well-advised to think about what Lawler and mgmt. might NEXT do to improve CHK's financials and take it into consideration when considering both their own and Mr. Market's opinion about the value of this company.
Luck is not something to be pushed too hard.
and a disaster for the longs. You can post all the positive opinions you want, this is your reality. I will wait for the RS and short it again - free money.