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How Would You Play Chesapeake Energy? Part 2

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How Would You Play Chesapeake Energy? Part 2 PART 1 OF 9

What Does Chesapeake Energy’s Debt Position Indicate?

Chesapeake Energy’s net debt-to-EBITDA

In a previous series, we looked at Chesapeake Energy’s (CHK) operational performance and goals, key objectives, and strategies it deployed this year. In this series, we’ll look at the company’s key fundamentals.

In 2Q17, Chesapeake Energy’s net debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) was ~5.5x.

What Does Chesapeake Energy’s Debt Position Indicate?

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Looking at the above graph, we can see that Chesapeake’s net-debt-to-adjusted EBITDA multiple has risen steadily since 2Q15 before it started falling in 4Q16 and afterward.

A similar trend was exhibited in CHK’s net debt levels. Net debt had been rising since 2Q15, peaking at 1Q16 before it started declining. Recently, however, CHK’s net debt levels have risen again, albeit remaining lower than 1Q16 levels.

CHK’s adjusted EBITDA has shown an opposite trend. Between 2Q15 and 3Q16, its adjusted EBITDA was showing a consistent declining trend, falling from ~$5.0 billion in 2Q15 to ~$1.3 billion in 3Q16. A combination of rising net debt and falling EBITDA explains the rising net-debt-to-adjusted EBITDA between these periods.

However, from 3Q16, CHK’s EBITDA starting rising. Its trailing 12-month adjusted EBITDA was ~$1.8 billion in 2Q17. Net debt was mostly falling during this period, explaining the declining net-debt-to-adjusted EBITDA multiple.

In 2Q17, CHK reported a net debt of $9.8 billion, which was higher both on a year-over-year (by 2.0%) and sequential (by 6.0%) basis. As we saw above, its trailing 12-month adjusted EBITDA for 2Q17 was ~$1.8 billion, which was higher both on a year-over-year (by 29.0%) and sequential (by 13.0%) basis. So while both CHK’s net debt and adjusted EBITDA rose in 2Q17 compared to 2Q16, the increase in its adjusted EBITDA was greater than the increase in its net debt, explaining 2Q17’s lower net-debt-to-adjusted EBITDA multiple compared to 2Q16 and 1Q17.

CHK’s debt continues to exert pressure

At the end of 2Q17, CHK had a principal debt balance of $9.7 billion, which was lower than the $10.0 billion debt principal balance at the end of 2016. As we can see, this is still significantly higher against CHK’s market capitalization of $3.4 billion. Needless to say, a lot of investor attention has been focused on CHK’s continued debt reduction efforts against a backdrop of weak energy prices.

Let’s expand on this in the next part of the series.

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