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How Chesapeake Energy Is Funding Its Negative Free Cash Flows

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Chesapeake Energy’s normalized free cash flow in 2017

For 9M17 (the first nine months of 2017), Chesapeake Energy (CHK) had normalized FCF (free cash flow) of ~572%, the second lowest among the oil and gas producers we have been tracking. To know more about our normalized free cash flow methodology and filtering criteria, refer to part one of this series. In this part, we’ll study the CHK’s free cash flow trends and how CHK is funding its negative free cash flow.

Chesapeake Energy’s free cash flow trend

In the last four quarters, Chesapeake Energy’s FCF (free cash flow) decreased from -$127 million in 3Q16 to -$304 million in 3Q17. In the last four quarters, Chesapeake Energy’s free cash flows never turned positive and showed a mixed trend. CHK’s free cash flow fell sharply in 4Q16 and 2Q17. In fact, in 2Q17, CHK reported the lowest free cash flow of -$826 million in the last two years.

Chesapeake Energy’s normalized free cash flow trend

In the last one year, Chesapeake Energy’s (CHK) normalized FCF (free cash flow) decreased from -34% in 3Q16 to -92% in 3Q17. The decrease in CHK’s normalized FCF in the last four quarters can be attributed to the decrease in OCF (operating cash flow) and the increase in capital expenditures in the last four quarters.

Chesapeake Energy’s OCF decreased by ~12% from ~$376 million in 3Q16 to ~$331 million in 3Q17. However, Chesapeake Energy’s capital expenditures increased by ~26% from ~$503 million in 3Q16 to ~$635 million in 3Q17. The increase in CHK’s capital expenditure can be attributed to its increased activity level, whereas CHK’s average rig count has increased from 11 in 3Q16 to 17 in 3Q17.

Chesapeake Energy funded the operating cash flow deficit by raising cash from investment activities and financial activities. In the last one year, CHK raised ~$755 million by means of divestitures of proved and unproved properties. In the last one year, CHK’s cash and cash equivalent increased from ~$4 million in 3Q16 to ~$5 million in 3Q17, and its total debt increased from ~$9.7 billion in 3Q16 to ~$9.9 billion in 3Q17.

Chesapeake Energy’s stock performance in 2017

Year-to-date in 2017, Chesapeake Energy is one of the worst performing upstream stocks in the US. During this period, CHK’s stock is down by ~46.2% and underperforming natural gas (UNG) (UGAZ) prices, which are down by ~29.2% in 2017. In comparison, the SPDR Dow Jones Industrial Average ETF (DIA) rose ~27.9%.

Next, we will take a look at Parsley Energy’s (PE) free cash flow trends.

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