Chesapeake Energy Hits The Comeback Trail

After an absolutely blistering December and January, a ray of hope finally shines for the long-suffering shareholders of Chesapeake Energy (CHK).

Source: Chesapeake Energy Fourth-Quarter 2017 Earnings Press Release

As shown above, Chesapeake Energy reported more cash flow in the fourth quarter than it reported all of the previous fiscal year (or the current fiscal year-to-date third quarter for that matter). In fact that is probably one of the better quarterly cash flow reports in several years. For the first time in a long time, cash flow from operations nearly covered the drilling and completion costs.

If management can continue to report that cash flow, the annualized figure would be nearly $2 billion. Therefore cash flow would only need to increase about 50% more to meet basic lending guidelines. Cash flow neutrality needs a whole lot less improvement. The pressure to sell more properties will decrease immensely in the future.

It is still an uphill battle to climb out of the debt stranglehold by increasing production and cash flow. But management finally has a solid quarter after several years of false starts.

Source: Seeking Alpha Website February 23, 2018

The common stock clearly had its best day in a very long time as the stock jumped approximately 20% on the news.

Source: Chesapeake Energy Fourth-Quarter 2017 Earnings Press Release

Shareholders may wonder why the company trades at such a cheap share price to earnings. The cash flow shown above is a dramatic improvement, but it is still insufficient to service the debt load properly. Banks and lenders want to see improvement. This management has clearly delivered that improvement. Clearly the market wants more improvement.

Earnings are not uncommon after years of impairment charges and losses. A very common strategy is to be extremely harsh when measuring impairments so the earnings improvement appears more dramatic. Until this quarter the cash flow was not really confirming an improvement. Conservative accounting generally shows an improvement in cash flow before the earnings improve. Chesapeake Energy had a lot of non-recurring items in the past that prevented a very typical pattern.

Management also managed to decrease several key operating costs when measured per BOE. This progress is another step to sustaining a recovery. Shares outstanding have expanded considerably over the last two fiscal years. As the recovery progresses, the pressure to issue shares should also decrease. In the comparison above, shares outstanding fully diluted increased by nearly one-third. That kind of dilution will cap any capital appreciation prospects.

Source: Chesapeake Energy Fourth-Quarter 2017 Earnings Report Slides

Management reported considerable progress increasing well productivity. The increasing oil production has aided profitability and cash flow immensely. Management is finally beginning to discuss breakeven points as shown above. The key to increasing cash flow will be Eagle Ford and Powder River Basin results. Those two plays have the most oil potential at the current time.

Some other areas such as the mid-continental may develop more importance as an oil play. But right now two oil plays appear to dominate the company’s future prospects. Management beat production guidance. This management has needed a “beat” for a long time.

Source: Chesapeake Energy Fourth-Quarter 2017 Earnings Report Slides

The debt maturity profile still allows time for management to optimize cash flow. Oil prices have risen quite a bit. Therefore now is the time to take advantage of the commodity pricing by increasing production as much as possible. Management will have to get this company ready to survive the next inevitable commodity price downturn.

Production appears to finally be in a growth mode. Oil production appears to be in a very fast growth mode. Cash flow has improved sharply but needs to improve more. This is the first time in a while that this company has shown significant progress towards a long-term survival goal. Mr. Market noticed too. Now if management can produce several quarters of solid progress, then this stock could finally begin its long awaited recovery. Maybe the good old days are not that far away after all.

Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents and press releases to see if the company fits their own investment qualifications.

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