Can Chesapeake Script a Turnaround in its Fortunes? - Part I
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At a time when the companies operating in the oil and natural gas sector are feeling the heat of lower prices burning their profits, Chesapeake (NYSE: CHK) posted a profit of $972 million, which includes non-recurring items, for the second quarter of 2012.
Prices Taking a Beating
The decrease in oil and natural gas prices have affected most of the players operating in the segment, including biggies like Chevron (NYSE: CVX) and ConocoPhillips (NYSE: COP), and has also not spared Chesapeake’s quarterly performance. The average realized prices of natural gas and natural gas liquids have taken a beating this quarter, registering a fall of 64% for natural gas while natural gas liquids fell by 32%, when compared with the same period last year. The average realized price for oil increased marginally by 4.1%. While some companies registered a decrease in production too, Chesapeake has performed well in terms of production and witnessed an increase of 25% in total production, from last year, despite natural gas production curtailments. But the problem lies elsewhere for Chesapeake.
The Big Hurdle
The price of natural gas in the US used to be much higher a decade ago than it is now. This price premium attracted Chesapeake and it specialized in the production of natural gas and aggressively acquired plays in the onshore US which were overlooked by the biggies. But with the decrease in price and shrinking operating cash flows, Chesapeake is finding it hard to meet a whopping amount of debt of around $14.3 billion and also to secure new debt to finance its drilling and exploring activities. Chesapeake had only one feasible solution- to sell off unprofitable assets, and the company is doing just that.
Again, the decrease in natural gas prices have made it unfeasible to drill in some of the acreages held by Chesapeake and the company is looking to sell off these assets. It has already completed $4.7 billion of sales and looks to use the proceeds to service a $4 billion bridge loan obtained in May from Goldman Sachs Group and Jefferies Group, and thus reduce the outstanding amount to around $9.5 billion. Chesapeake is also looking to increase the share of liquids in its production mix, which is more lucrative in terms of the price premium.
There are many more questions remaining to be answered. Whether the company will be able to sell off its assets to meet its debt? What will be the effect of the company’s reserves? Will the company will be able to bring a change in its product mix? Whether the change is at all necessary? We can only wait and watch. Look out for the second part of this article for the answers to these questions. There's just one thing to do as of now: keep a close eye on the stock- it’s worth it.
anirbandutta has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.