Chesapeake Energy long
Chesapeake Energy Corporation is an American exploration and production company, which is headquartered in Oklahoma City. In 2021, the company produced 463 thousand barrels of oil equivalent per day, of which 69% was natural gas, 24% was petroleum, and 7% was natural gas liquids. As we've seen this year, most of the energy companies are doing amazingly well reporting new record revenues every quarter due to the price increases that have been happening. The same thing can be said about Chesapeake as just their EPS alone, has almost doubled compared to two quarters ago. As I also went more in-depth with my American Water report, these aren’t exactly the types of companies having been affected by inflation. The products they produce are items that are essential and can’t be reduced. Additionally, they don’t have the typical customer that companies such as Walmart have and so the increase in living costs is going to have zero effects on them. At the same time, they never spend any money on advertising or for example buying products that are never going to be sold like most retailers are losing money on right now so these problems also won’t affect them. However, something else that they will have to be dealing with are service and maintenance costs. Generally speaking, it’s much more expensive keeping these companies running compared to other firms. So this could be a make it or break it for them when it comes to their report this quarter. I personally don’t think these costs are going to have a big toll on them as it’s just a small percentage of their revenue. Their expected EPS also backs this up as it has been going up every quarter. Something I have on the back of my mind is how their natural gas segment will do. Although there have been significant price increases since last year, the demand has also significantly gone down due to the pricing. This could cut into their revenue but other segments could also make up for it.
Analyst’s opinions:
Over the last 3 months, EPS estimates have seen 6 upward revisions and 3 downward. Revenue estimates have seen 0 upward revisions and 3 downward.
YTD, Chesapeake shares have gained ~60%, compared to a decline of ~19% for the broader market indicator SP500
On Oct. 14, U.S. natural gas futures fell more than 4% to a near three-month low, as record production and reduced exports of liquefied natural gas allowed utilities to inject much larger than normal amounts of gas into storage for the winter in recent weeks.
In August, U.S. natural gas prices punched through $10/MMBtu for the first time since 2008, continuing to follow surging European prices as supply fears were heightened by Russia's plan to halt gas flows on the Nord Stream 1 pipeline to Germany for three days of maintenance.
Chesapeake Energy Corporation management recently announced that they will focus on basically natural gas basins while much of the industry is moving towards diversification.
The problem with this emphasis is that the United States generally is not the low-cost natural gas producer. The Canadian competitors have a natural advantage because the Canadian dollar is usually weaker than the United States dollar. Therefore, the Canadian companies can produce with Canadian dollar costs while using available takeaway capacity to receive revenue that is attached to the United States dollar.
The other issue is management needs to state that they will be a low-cost leader along with exactly how the company will get there. Specialists, which in this case is a natural gas focus, generally need a competitive advantage. That competitive advantage can be geology of the leases, or operating superiority, or sometimes vertical diversification (for example). Here there just seems to be a migration towards a goal without "filling in the blanks" for shareholders. When that happens, the risk of a strategy backfire tends to rise in the long term.
The announcement about selling the Eagle Ford properties appears to be ditching some safety at a time when management should be looking to minimize a second future bankruptcy filing. One thing that characterizes this industry is that financial ratios are conservative until they are not in a cyclical downturn. Similarly, the profit outlook of any one line of commodities can rapidly change.
What should have happened instead, was an emphasis on cost reduction and efficiency improvement. Chesapeake Energy is large enough that diversification should be a necessary strategy consideration along with leadership in all the areas in which the company operates.
The latest management shareholder presentation has some vague details about costs. The problem with that is a lack of specifics usually signifies operational challenges and possibly a lack of will to tackle cost issues. Managements that are specific and blunt about their objectives generally will resolve profitability issues.
Some of the costs that management does show are actually among the highest costs of the companies I follow. All three of the drilling costs per foot are sky high compared to many competitors these days. High drilling costs can be made up either through some kind of production mix advantage or a cost advantage elsewhere. But the slide above does not show any offsetting costs to bring overall costs "in line." That can signal trouble during the next inevitable industry downturn.
Similarly, with the emphasis shown above to the right on natural gas production, the corresponding costs to the left appear to be pretty high. Several of the comparisons are known rich gas producers. Those producers will have a higher revenue value of production to justify higher costs. This company appears to be focusing the future on dryer gas. Then, the costs need to be rock-bottom to assure long-term survival. The scary part of this for shareholders is that management may be heading back to ways in the "good old days" that really were not so good.
A lack of disclosure is one of the things that can materially increase the risk of an investment because it makes quite a challenge for an investor to come up with an investment strategy when key information is lacking.
Report time: Today after market close
Estimate: +2.5%
Market cap: 12,428,082,365
P/E ratio: 10.73