Chesapeake Has Done it Again

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A few days ago Chesapeake Energy Corporation (NYSE: CHK) announced it will take a $2 billion loan for a five year period in order to rollover its current loans and assist the company’s cash flow problems. Just as I thought the company is starting to pull out of its financial mess, the company made this announcement. Investors didn't respond well to this news as shares of the company tumbled down in recent days. This means the company’s asset sales weren’t enough to close its current standing loan as the company had intended to do by the end of 2012. Moreover, the recent third quarter financial reports of the company weren’t positive and showed a sharp drop in revenues and earnings. Based on the above, where is Chesapeake headed? Let’s examine the recent developments of this company.

Chesapeake's Micro View

In recent months, the company had sold many of its assets mainly related to its natural gas operations (but not only). The payoff for selling these assets were intended, according to the company’s press release, to fully pay the company’s $4 billion loan by the end of year. Alas, the recent $2 billion loan means the full repayment won’t be this year.

Despite the sell-off of assets the company still produced more crude oil and natural gas during the third quarter compared to the same quarter in 2011. The main factor for pulling down sales was the low average realized natural gas price, which reached a $1.97 per mcf in the third quarter. In comparison, during the third quarter in 2011, the company’s average realized natural gas price reached $4.82. Alternately, the rise in the price of oil – during the third quarter compared to the same quarter in 2011 – has offset the decline in revenues. 

The company’s operating profitability has also declined during the third quarter compared to the previous quarter and compared to other leading oil and gas producers.  As seen in the table below, the operating profitability of Chesapeake was only 6% during the third quarter of 2012. In comparison, the operating profitability of Chevron Corp (NYSE: CVX) reached 17% and the operating profitability of ExxonMobil Corp (NYSE: XOM) was nearly 15%.

<img src="/media/images/user_12845/operating-profitablity-chk-chevron-and-exxon_large.jpg" />

In regards to the operating profitability of Chesapeake I have made an adjustment and excluded from the operating costs the company’s goodwill adjustments that were sizeable this quarter: the company had an impairment of natural gas and oil properties provision of $3.315 billion, which was, among other reasons, due to the drop in the price of natural gas. 

These results don’t look well for the company. Let’s examine the company’s relation with natural gas and oil.    

NG and Chesapeake

Natural gas rose in recent days and may continue to rally in the weeks to follow.  During the past couple of days the price of natural gas increased by nearly 6.9%. Moreover United States Natural Gas (NYSEMKT: UNG) also rose by 6.7%.  Conversely, Chesapeake's stock tumbled down during recent days: since the beginning of the month, shares of the company declined by nearly 14.2%. Despite the recent rally in the price of natural gas, it is still lower than last year’s price (for this season) and much lower than the five year average. This means that unless the price of natural gas will hike to its five year average price, this sector is likely to continue lowering the profit margin of this company.

Oil and Chesapeake

During recent weeks, the price of oil has declined. As I have pointed out in the past, I still think the price of oil will continue to dwindle in the weeks to follow and may settle around the low 80s or high 70s. The correlation between the price of oil and Chesapeake may have also contributed to the fall of Chesapeake during recent days. During October and November, the linear correlation between the company’s stock and oil price daily percent reached 0.62. This means that nearly 39% of Chesapeake's stock movement could be explained by the shifts in the price of oil.  Therefore, the decline in Chesapeake's stock may have been partially due to the fall in oil prices. Thus, if the price of oil will further fall, it could also adversely affect the company’s stock.   

The chart below presents the relation between Chesapeake, crude oil price, and Henry Hub during the year (up to date). As seem below, despite the recent rally in the price of natural gas, it didn’t help Chesapeake’s stock. Moreover, the fall in the price of oil may have offset the positive effect the rally in the price of natural gas may have had on the company’s stock.

<img src="/media/images/user_12845/chesapeake-and-natural-gas-prices-2012nov_large.jpg" />

Based of the above, I think the recent move of Chesapeake suggests the company is still not out of the woods despite the many asset sales the company has completed in recent months. The low natural gas price, compared to previous years, and the ongoing fall in the price of oil are likely to keep the company’s revenues falling in future quarters.

For further Reading:  

Will Oil Continue Its Tumble?

Will Exxon Continue To Trade Up?


liorc has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, short JAN 2014 $15.00 puts 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.

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