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Chesapeake Energy: Running Out Of Options

Mar. 01, 2020 10:19 AM ETChesapeake Energy Corporation (CHK)101 Comments


  • 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

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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.

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Comments (101)

With OPEC+ switching over to Mkt share- prices have tanked to the point shale oil drilling will nose dive quickly, this will help N G began to shift to higher price levels by summer fall.
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,
lol i guess you are LONG CHK people, welcome back !! LOL
Can someone or the author explain to me why depreciation costs are raised as a concern to CHK?
Crude Man profile picture

I think the author is confusing the fact that the tax reform allows for the acceleration of depreciation costs to the year in which they occurred, rather than the old fashioned methodology of the government making you split your tax expenditure claims out over 7 years.

The author appears to be looking at the depreciation claims(which offset taxes) as a metric for how profitable the company is, since those charges offset taxes, etc.

The first year of "accelerated" depreciation(which should be how it is with all businesses - yet the feds say no) seems to have thrown the author for a loop due to the size of it.

I could be wrong on the author's purpose, though. It is a confusing section. Either way, the focus on it is a bit odd and not overly important.
Raw Energy profile picture
I think the author is stating that relying on the accounting DD&A figures as a measure of CHK's true profitability, and perhaps its reserve replacement costs going forward, may overstate expected returns because the historical #s have been reduced over time by impairments. DD&A therefore appears lower than actual historical costs by the amount of the impairments.

Of note, CHK changed its method of accounting from the Full Cost to Successful Efforts method in '19, in the process reversing at least some of its prior impairments.
The Value Investor profile picture
That is exactly correct. I have noticed higher D&A as well, good to see that it is the reuslt of the accounting change.
To FM5, I agree with your thoughts that oil will be in demand for a long time to come. Global
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.
lets hope you learned your less

Aubrey was a mountbanke, not to be trusted
hedges won't save anyone
debt kills
and pay attention to the CHARTS, not the BS opinions of humans.
LaGree profile picture
After reading the comments, It seems everyone's opinion is based on whether they are long (holding on for dear life), or short (company going bankrupt). What I did not see in all the discussion is much consideration of market and economic conditions going forward. More specifically, should the Fed come out with the currently expected emergency 50bp rate cut, my personal opinion is that six months after the cut, not only will oil prices stabilize, but because of the subsequent dollar sell-off following the cut, oil will rise. In fact, if memory serves me well, when the Fed took rates to zero in 2008, CHK, which lost 90% of its value, going from ~$70 to $7, actually rebounded to ~$33 in 2011 thanks to oil shooting to $120/barrel. My point is simple. Seeing what I see in the market when it comes to these companies, I am adding to and building positions in several of these companies.
NG won’t touch 2.00 rest of year... oil won’t touch 55 unless opec cuts production...too much supply on both ends
$70 and 7
is not the same at $10 to 22 cents - can you see that or not?
Yeah, but thanks to companies like CHK, there's now a permanent over-supply of oil & NG, such that neither are likely to ever rise like they did.
So today was a huge up day for the overall market and oil. Even crappy nat gas was up. CHK down 20%. Writing on the wall folks....this thing going BK soon
No Identity profile picture
Anybody who buys into a failing company deserves what they get. Buy a company that has a solid balance sheet. It may go down in price ,but the odds are better.
No Identity profile picture
Anybody remember Linn Energy? Pie in the sky.
Vangel profile picture
"The company continues to post real losses and flattish capital net capital spending does not allow for production growth."

Who cares about growth? Losing money to generate growth was what turned CHK into a burning match. Yet, few analysts had the stones to call the obvious and state that the ultimate destination was bankruptcy court.

"The outlook is dismal with nearly $10 billion standing in a senior position to the remaining half a billion which equity still represents."

It was always dismal. But while the shale bubble was expanding nobody cared. Now that the curtain has been lifted and the actions of the Fed and promoters have become visible to all, support for the shale fraud seems to be fading.
...and is'nt that exactly the time to start buying 😉
Not time to buy the equity - its likely worthless.

The bonds? Maybe. Trading as low as 30% of par.
Vangel profile picture

"...and is'nt that exactly the time to start buying 😉"

I can't say. The comment is made at $0.26 and the shares have gone up 15% all the way up to $0.17. I think that DT Now is in the market trying to average down.
With the hedges in place, any serious talk of bankruptcy is EIGHTEEN months off in the future - and that's if nothing changes (and change is constant).
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.
Vangel profile picture

Nonsense. CHK is in huge trouble and the last thing these guys need to hear is more hype and false hope from charlatans who tell them that all is well. DT is down more than $300K by now yet he still remains a believer. Perhaps if fewer idiots were ready to give him hope where none existed he could have limited his losses.
Hedges won’t save companies that are fundamentally broken. MEMP had the best hedges in the industry and still went BK.
Since Big Sur knows BK he should explain to these amateurs here how Chap 11 works.
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.
DT Now profile picture
LOL. Watch for a Haynesville deal which will bring in enough money to pay off the 2026 convertible bonds. Then let’s revisit your sordid theory that the company is going to go bankrupt.
the only thing sordid here is the 98% drop.

remember when you said you would wait for $7?

and now?
DT Now profile picture
Averaged down and still waiting. Unlike most people posting on the site, I am patient. If I truly thought it would go bankrupt, I would have sold.
FIRE LAWLER!!!!!! Zero confidence in this guy, get a turnaround specialist then at least we can have a sliver of hope
@EricR903 . Every time I've felt the same (i.e. fire Lawler) the guy's pulled a rabbit out of the hat. Be patient. He's not just sitting on his duff. Things are happening that they're not ready to present to us...yet.
Vangel profile picture
@EricR903 .

It is not Lawler. Shareholders were told that there were funding gaps ever since I started following the company but they refused to figure out what was being said on the conference calls. Aubrey was clear. Lawler was clear. But they added enough fluff to distract people and get them to believe in whatever they wanted to belive.
I agree about the funding gaps. However, Lawler clearly overstated his intent on asset sales and expense reductions, other than words on the earnings call I saw little from them; it was business as usual
Fracking follows a classic “crowd overtaking the market mentality“... an emotional cycle not a rational one when the US feared that OPEC has reached peak oil: since 2008 (1) speculation, (2) credit expansion, (3) financial distress (vast debt loads), (4) crisis (over supply, COVID19), (5) panic and crash.

“U.S. oil production started to rise in 2008, and the next seven years marked the fastest oil production increase in U.S. history. Instead of continued declines, production of U.S. crude oil and natural gas liquids increased by an astounding six million BPD. Net imports of crude oil and products to the U.S. fell from 12.5 million BPD in 2005 to 4.7 million BPD in 2015. The U.S. began exporting finished products and even crude oil into the market” Forbes
well said, indeed.
Vangel profile picture
"Fracking follows a classic “crowd overtaking the market mentality“... an emotional cycle not a rational one when the US feared that OPEC has reached peak oil: since 2008 (1) speculation, (2) credit expansion, (3) financial distress (vast debt loads), (4) crisis (over supply, COVID19), (5) panic and crash."

But conventional oil has peaked. And shale oil and gas is not economic. If you want to destroy capital it is easy to keep making crap at a loss. The shale sector is particularly good at that. But that is not all that sustainable.
Demand for natural gas is growing - not decreasing.
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.
NG is increasing, not decreasing? Where do you get this info? Logically this makes sense, but still will appreciate this info!
Vangel profile picture

"Nobody is going to produce to lose money - not even distressed companies."

But that is what the shale sector has done for the past decade. It produced product and sold it at a loss.
Why is that? Because it costs them more to find it and get it out of the ground than they can charge for it or because of poor mgmt. decisions, e.g. debt, etc.?
And if CHK becomes cash-flow positive by the end of the year as they are attempting, what will you say then?
1. thee float is to big to squeeze the shorts. 2. the r/s is already a lock (the tutes still holding as hold the debt and will be made hold by warrants to buy shares when they dilute after the rs). 3. No one will buy assets at a reasonable price in the next 12 months. 4. Further debt finnanciag costs too much. 5. with much better commodity pricing and a debt for equity swap they still added 200m to debt and lost money. 5. mgmt has already diluted with wild horse and debt for equity swaps...they will again after r/s....it's their only option other than a prepackaged bk...either way current shareholders lose. Last you would have to believe commodity markets spotanesly rebound to sustained $70 wit n 4 gas for chk to rebound or a buyer is willing to pay full price for a highly distressed co....neither is going to happen...better off selling on spikes n getter into better companies that are on sale right now.
Bikerron1 profile picture
I am long chk and looks like I will be holding the bag. With a very big lost.
hang in there im with you . you only lose if you sell
Your not alone
or ride it right into the ground
relying on a short squeeze with this dog is like relying on trump to tell the truth
SpaceShuttle profile picture
One thing on top of all negative shit that has been repeatedly being written every f#*#king day, keep in mind... Management is actively working on Asset Sell Options and if one of that even worked out, this stock at 0.27 has power to recover 0.75 in matter of day.. So short wisely, dont short 0.27 but try shorting 0.7x otherwise, any positive news for this company can spread Shorts leg open and hit on ball real hard..
Never going to happen. They've been saying the same old tired BS message on earnings calls for 3 years. Instead all we got was a 95% decline in stock price.
Vangel profile picture

"Management is actively working on Asset Sell Options..."

Everyone knows that. That is why nobody will bid enough to offer CHK a profit on the sale. And if CHK sells at a loss or at fair value it still won't be able to help its shareholders.

"...and if one of that even worked out, this stock at 0.27 has power to recover 0.75 in matter of day.."

It is now $0.22 and a bit further from $0.75 than when you posted your comment.

"So short wisely, dont short 0.27 but try shorting 0.7x otherwise, any positive news for this company can spread Shorts leg open and hit on ball real hard.."

Are you allowed to short penny stocks?
SpaceShuttle profile picture
Again same chewed message every day!!! Oh god, leave this f*#?king company alone.. Go find something else for negative write up. . everyone knows this company is in road od recover only if NG & OIL recovers.. MFs plz stop writing same shit..
Vangel profile picture

The crowd never got the message at $10. It missed it at $5. And $1. Now that it is $0.22 you blame the people who were right?
01 Mar. 2020
Look at the live view on Flightradar24 no Jets have slow down in the Sky all still going across the ocean all day long , everybody I know it’s still going to work , Next 99.9% of all cars still run on gas & oil , ChryslerIs the leader in truck sales all these Hemi engines takes 7 quarts of oil and the diesels take 3 gallons to fill , believe me when I tell you oil’s not going anywhere but up , Gas prices have been depressed for way too long consider it a gift when you fill up at the pumps
There seems to be a common thread of thinking among the CHK bears these days, i.e. that CHK mgmt is content to be complacent and satisfied with cursory fixes while the company slips closer and closer to bankruptcy.
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.
dukenukum profile picture
well said
what you fail to admit is this has been a GRAVY TRAIN for shorts
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.
You're kidding right????? If the house was in order the stock price wouldn't be down 95%+ under Lawler's watch. He's a BS artist. He continued with the drill baby drill strategy and blew thru cash just like Aubrey.
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