Chesapeake Energy: More Reasons to Buy
In a recent article on Chesapeake Energy (CHK), I had focused on how the company is preparing itself for a low oil and gas pricing environment by reducing the cost base on the back of improved drilling efficiencies. In fact, we had seen that most of Chesapeake’s oil and gas assets are now capable of achieving break-even at oil prices of less than $50 a barrel, as a result of which its gross margin has been better off as compared to the drop in the revenue.
But, apart from these operational improvements, there are some more macroeconomic points that could help Chesapeake improve its financial performance going forward. Let’s check them out.
The oil patch might improve
WTI oil prices are once again flirting
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A study from Columbia University's Center on Global Energy Policy forecasts lower gasoline prices and geopolitical benefits, and the centrist Brookings Institute issued a research report citing the economic benefit to exporting US crude oil.
Congress wants action. On 9 October the House of Representatives voted by 261-59 to end it. Two different Senate subcommittees also approve of ending the ban."
Hence, positives are emerging in the oil patch and this is good news for Chesapeake Energy. The company has already worked upon reducing costs, and this could help it improve its margin profile. Concurrently, the company has also increased its production, and this will be a tailwind in allowing it to tap the expected growth in demand.
More positives to consider
Chesapeake has a strong production profile despite lowering its costs aggressively. For instance, last quarter, Chesapeake produced an aggregate of 667,000 Barrels of Oil Equivalent ((BOE)), an increase of 3% on a year-over-year basis. The average daily production in the third quarter consisted of approximately 114,100 barrels (bbls) of oil, 2.9 billion cubic feet (bcf) of natural gas, and 76,200 bbls of NGL, which represent year-over-year increases of 4%, 2% and 7%, respectively, adjusted for asset
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On the other hand, the company has lowered its estimated total capital expenditures to a range of $3.4 billion-$3.9 billion, down from $3.5 billion-$4 billion as previously expected.
Additionally, Chesapeake has enough liquidity in order to pursue development projects at assets where its cost profile is favorable. For instance, at the end of the third quarter, the company had over $1.7 billion in cash and an undrawn credit facility with a capacity of $4 billion. Also, the covenants of the credit facility have also been amended toward the end of the quarter, and the company CFO, Nick Dell'Osso describes this as “an important step in securing and enhancing our liquidity through the term of the facility in 2019.”
These amendments are structured without considering any asset sales or a commodity price rise. So, any positive event regarding those two factors is bound to boost the strength of CHK’s balance