Chesapeake Energy: Natural Gas Price Helps

Summary

• Chesapeake reported a net loss of $345 million in 3Q21, or $3.51 per share, compared to a $745 million loss, or $76.18 per share, in the year-ago period.
• Production was 436K Boep/d this quarter, down 2% from the same quarter a year ago and up 0.7% sequentially.
• Chesapeake Energy increased the base dividend by 27% to $1.75 per share annually. The board authorized a $1 billion stock repurchase.
• Looking for a helping hand in the market? Members of The Gold And Oil Corner get exclusive ideas and guidance to navigate any climate. Learn More »

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Introduction

Oklahoma City-based Chesapeake Energy (NASDAQ:CHK) and 40 affiliates voluntarily filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of Texas on June 28, 2020.

On February 10, 2021, Chesapeake Energy Corp. emerged from Chapter 11 bankruptcy with a business plan focused on natural gas after recently pursuing crude oil production.

On November 1, 2021, Chesapeake Energy completed the acquisition of Vine Energy Inc.:

The transaction was approved by Vine stockholders at a special meeting held on November 1, 2021. Vine stockholders will receive fixed consideration of 0.2486 of a share of Chesapeake common stock plus $1.20 cash for each share of Vine common stock issued and outstanding.

On November 2, 2021, Chesapeake Energy released its third-quarter 2021 results.

1 - 3Q21 Production snapshot

Source: Presentation

CFO Nick Dell'Osso said in the conference call:

I'm very pleased with our strong third quarter results and could not be more encouraged about the direction we're heading as a company. Behind our talented workforce, strong balance sheet, great operational track record and advantaged ESG profile, I firmly believe Chesapeake sits in an incredibly strong position today and is poised to consistently deliver best-in-class returns to our shareholders.

Note: On November 30, 2021, Chesapeake Energy announced that Mohit Singh had been appointed Executive Vice President and Chief Financial Officer, effective December 6, 2021.

2 - Investment Thesis

The investment thesis for CHK has improved over the past few months.

I consider CHK an excellent trading tool for short-term trading, but due to a much better outlook for natural gas, it is reasonable to invest long-term in a medium position as well. The balance sheet looks solid after the reorganization.

However, it will take a long time before the shareholders' confidence will be fully restored, and you should remain cautious.

3 - Stock performance

CHK is up 34% on a one-year basis and has significantly outperformed Coterra Energy (NYSE:CTRA).

Data by YCharts

Chesapeake Energy - 3Q21 Quarterly Financial Table: The Raw Numbers

Chesapeake CHK	3Q20	4Q20	1Q21	2Q21	3Q21
Total Revenues $ Million	959	1,219	1,140	691	887
Net Income in $ Million	-745	-416	5,678	-439	-345
EBITDA $ Million	-550	-232	-387	-421	-338
EPS diluted in $/share	-76.18	-42.27	537.26	-4.48	-3.51
Operating cash flow in $ Million	382	9	388	394*	443
CapEx in $ Million	3	4	143	149*	178*
Free Cash Flow in $ Million	379	5	245	245*	265*
Cash and cash equivalent $ Million	306	279	340	612	849
Long term Debt (including short term) in $ Billion	1.929	1.929	1.262	1.261	1.259
Shares outstanding (diluted) in Million	9.78	9.78	97.91	97.93	98.22
Quarterly dividend $ per share	-	-	0.3438	0.3438	0.4375
Oil Equivalent Production	3Q20	4Q20	1Q21	2Q21	3Q21
Oil Equivalent Production in K Boepd	445	435	436	433	436
Oil equivalent price realized (composite) in $/Boe	16.40	16.84	24.09	22.64	29.14

Click to enlarge

Source: Chesapeake Energy 10-Q and Morningstar/Fun Trading

* Estimated by Fun Trading or indicated by the company.

Analysis: Revenues, Free Cash Flow, Net debt, And Oil & Gas Production

1 - Quarterly revenues and others were $887 million in 3Q21

Chesapeake reported a net loss of $345 million in 3Q21, or $3.51 per share, compared to a $745 million loss, or $76.18 per share, in the year-ago period.

2 - Free cash flow was estimated at $265 million in 3Q21

The generic free cash flow is cash from operating activities minus CapEx.

Trailing twelve-month free cash flow ("ttm") is estimated at $265 million. The quarterly free cash flow for 3Q21 was $265 million, indicated by the company. In the press release:

Chesapeake's Board of Directors increased its base quarterly dividend on its common shares to $0.4375 per share, representing a 27% increase compared to the previous dividend amount. The base dividend will be payable on December 9, 2021 to shareholders of record at the close of business on November 24, 2021. Additionally, Chesapeake plans to adopt a variable return program that will result in the payment of an additional dividend, payable beginning in March 2022, equal to the sum of free cash flow from the prior quarter less the base quarterly dividend, multiplied by 50%.

Also, on December 2, 2021, CHK announced authorizations from its board of directors to buy back up to $1 billion of its common stock and/or warrants. CHK added that the stock repurchases would occur from time to time over the next two years.

3 - Net debt is $0.41 billion in 3Q21.

The company reports total debt of $1.259 billion and cash and cash equivalent of $849 million.

The net debt at September 30 to 2021E adjusted EBITDAX ratio is 0.2x.

4 - Quarterly Production was 436K Boepd in 3Q21

• Production was 436K Boep/d this quarter, down 2% from the same quarter a year ago and up 0.7% sequentially.
• Chesapeake is currently operating eleven rigs across all its business units, with three rigs in Appalachia, six rigs located in the Gulf Coast, one rig in the South Texas Eagle Ford Shale, and one rig in the Powder River Basin.

• The price per Boe (composite) rose this quarter to $29.14 and was 77.7% higher than the same quarter a year ago and up 28.7% sequentially:

• Below is the output in K Boepd per basin in 3Q21. The company is producing from five different locations in the USA.
• Chesapeake Energy is mainly a domestic gas producer representing 79.6% of the total output for the third quarter of 2021.

Note: the company is hedging its production, but we can realize that it is a waste of precious cash if we look at the past. I will not cover this subject here because it gives a false sense of security and a real potential for loss.

• Updates to 2021 Guidance

Chesapeake Energy expects full-year 2021 average daily production to be approximately 415-435K boep/d. The company's planned CapEx for 2021 is $670-$740 million. For 2022E:

Source: Presentation

Chesapeake increased its expected 2021 adjusted EBITDAX range to approximately $2.1 billion to $2.2 billion, up from $1.8 billion to $1.9 billion previously, and incorporating the earlier-than-expected closing of the Vine acquisition.

The company increased its total annual production while maintaining its commitment to disciplined spending with no change to its previous capital program.

Additionally, Chesapeake increased its preliminary 2022 adjusted EBITDAX outlook to $3.2 to $3.4 billion, up from $2.55 to $2.75 billion, with projected results primarily based on recent commodity prices.

Technical Analysis (short-term) and commentary

CHK forms a descending channel pattern with resistance at $63.5 and support at $56.5. The trading LIFO strategy is to sell at or above $63.4+, and you should consider accumulating between $57 and $56.

However, the Natural Gas price, which is the most critical component for CHK, is substantial, and depending on the situation, CHK could cross the resistance and retest $67.5. Conversely, CHK could break down if the Natural Gas price loses momentum and trades below $54.

In my opinion, the best way to profit from your investment in CHK is to trade LIFO about 60% of your total position while keeping a small core long-term position for a potential retest of $80s or higher.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks!

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Comments

[EF Hutton]

Does this dog still have any oil in portfolio?

[Fun Trading]

@EF Hutton

Look at my article, you have the graph repartition oil, NG, NGL.

[karondongotbanned]

@EF Hutton if you follow CHK like me since 2010, the original unadjusted price is at 500 dollars per share. like me, i bought at 300. then it went bankrupted. got delisted, stock disappeared, i lost all the shares. now it relisted in nasdaq JUST BECAUSE every stock is overvalue and they can squeeze more money.

[EF Hutton]

@karondongotbanned I sold my small position for huge tax loss yesterday. I was an unsecured bond holder

[elliot_mllr]

Has the dramatic decline in the Henry Hub price in the last week of trading impacted your view, or do you think that it is temporary based on short term weather conditions and predictions?
Elliot Miller

[Fun Trading]

@elliot_mllr

I believe this setback is temporarily based on short-term weather conditions, as you said. The underlying fundamentals are strong and getting stronger. Natural gas is highly cyclical and will create volatility.

[kwayne01]

Hedging was specifically not discussed, but it is a big part of the story for CHK. The company is currently highly hedged, something like 75% for the remainder of 2021 and 50% for 2022. The hedges were made during bankruptcy at relatively low prices. The result of the hedges is that CHK is showing an accounting loss while still being cash flow positive. Being cash flow positive allows them to pay the dividend without increasing debt. To me a big part of the upside for CHK is that the company could become extremely profitable when the hedges roll off.

[Fun Trading]

@kwayne01

Thank you, good points, It is always possible, but it is dangerous to think too far into the future. Ask a few old shareholders how they learn that.

[Joe Away from Beach]

The in the money long term warrants might the best way play this stock

[Fun Trading]

@Joe Away from Beach

Thank you for your suggestion.

[Optionputter]

@Joe Away from Beach How does one trade warrants? Sounds interesting.

[Joe Eifrid]

@Optionputter The warrants trade like a stock. I dont have the symbols but easily found typing CHK in a popup menu.
Would not buy the warrants. Deep in the money. Buy the common and get the dividend.

[Trggr]

Previous CHK shareholders would like a word with management.

[Fun Trading]

@jminni

I can understand that...

[karondongotbanned]

@jminni i lost all my shares at 300 dollars per share. it wasnt pretty

[Optionputter]

Yield trap? Pass.

[Fun Trading]

@Optionputter

CHK is in much better shape now after the restructuring and the jump in NG. What do you mean by yield trap? Thank you for explaining...

[Littlebeef2]

@Fun Trading Not sure how a 345 million dollar less leads to a large dividend increase and a billion dollar share purchase. Isn’t the corporate goal to make profit? Maybe not if they Woke.

[Fun Trading]

@Littlebeef2

I am generally against those buybacks. $1 billion over two years is a lot of cash that they are not making. Increased dividends could eventually be explained by future free cash flow. This policy of dead money (in business terms) could backfire.

[Philip3]

Not sure how a 345 million dollar less keads to a large dividend increase and a billion dollar share purchase.

[Fun Trading]

@Philip3

Yes, I think they bet on the next few quarters bonanza?

[nathanjw7453]

@Philip3 was thinking the same