On a day where markets were down from the start and showed nary a glimmer of hope even with the signing of the economic stimulus package, the hits continued with Chesapeake Energy (CHK) swinging to a loss as they reported after the close. The company reported net loss of $886 million, mostly because of $1.8 billion in one time charges related to writing down assets that are less valuable now that the price of natural gas has fallen so much recently. In terms of real operations (excluding one-time charges) the results fell just short of consensus estimates as the company generated net income of 73 cents per share versus estimates of 74 cents. Furthermore, the company increased revenue in the quarter by an impressive 43% on a year over year basis.
Chesapeake was off nearly 8% on the day, and has fallen further since the earnings were released at the close. However, when you compare the $1.8 billion write down to the $7.1 billion write down reported recently by Chesapeake’s competitor Devon Energy (DVN), Chesapeake’s assets look comparably far more attractive. Chesapeake is considering selling stakes in some of its highest producing fields including the Barnett Shale, currently the largest and most prolific unconventional natural gas resource field in the U.S., according to the release. This property’s available average daily production increased 55% from a year ago and is home to 25 rigs at present. Over the past several months, Chesapeake has sold stakes in all three other major shale operations, with Barnett being the only remaining holdout. CEO Aubrey McClendon commented:
“Looking ahead, we believe that investors will increasingly recognize Chesapeake’s competitive advantages, including our industry-leading asset position in the Big 4 shale plays, our strong hedge position and our $4 billion in drilling carries, which will enable Chesapeake to deliver operational and financial results that we believe will be among the best in the industry for years to come.”
The fact that Chesapeake is willing to part with a portion of its leases in the valuable Barnett Shale speaks to just how tough things have gotten for natural gas producers as the price per unit has dropped from about $14 to just over $4. One of Chesapeake’s biggest problems right now is debt, as the company has a not insignificant amount of long term debt of more than $11 billion. We have little doubt Chesapeake will generate enough cash over the long term that the long term debt is not so much of a problem. However, more pressing are the company’s current liabilities of $2.7 billion which will come due in less than a year. With so much of Chesapeake’s assets tied up in leased property, as much as they may not like it, selling some of these assets may be the best way to cover the $1.3 billion gap between current assets and current liabilities.
So, although the price of CHK does look appealing compared to historical norms as sales growth has been quite strong and earnings are decent (excluding write downs), we are maintaining our Fairly Valued rating. At this point, the company has too much debt to ignore even if its shale leases are increasing production at an attractive rate. Of course, were the price of natural gas to recover in short order than Chesapeake would likely be able to keep its interests in all of its leased properties. All in all the company is managing fairly well to stay profitable considering the drop in gas prices, but at this time there is still a lot of risk until the company can get its debt liabilities under control.