Today, Chesapeake Energy (CHK) reported its third-quarter earnings. The company reported an adjusted net loss of 11 cents per share. Notably, analysts’ consensus estimates suggested a negative EPS of 10 cents per diluted share. The adjusted earnings were negative for the second consecutive quarter. The adjusted total production for the last quarter increased 3% on a YoY (year-over-year) basis.
In the pre-market session, Chesapeake Energy’s stock prices have fallen 6.8%. The company kept the production and capital expenditure guidance unchanged for 2019. Chesapeake Energy’s management reduced the 2020 capital expenditure by almost 30%. The financial discipline adopted in lower commodities prices environment didn’t boost investors’ confidence. On a YTD (year-to-date) basis, Chesapeake Energy’s stock prices have fallen 25.7% as of Monday.
The quarterly earnings report, the “average realized oil price” for the third quarter was 3.2% higher on a YoY basis. Meanwhile, the “average realized natural gas price” fell 11.5% during this period. NGLs prices have fallen more than 50% during the same period. These realized prices only include “realized gains (losses) from hedging.” Overall, the fall in natural gas and NGLs prices might have impacted the company’s earnings in the last quarter.
Chesapeake Energy’s guidance
In the fourth quarter, oil production might rise 10% on a sequential basis—based on management’s guidance. However, the growth in oil production might stall in 2020. Ten to 13 rigs could be utilized for the next year. The total projected capital expenditure will be between $1.3 billion and $1.6 billion for 2020.
The quarterly earnings report said that that capital expenditure is “contingent upon commodity prices.” In 2020, the company’s management plans to reduce “production and general and administrative expenses” by 10%. The reduction would improve the company’s profitability.
Is the oil-mix strategy working?
In the earnings report, Doug Lawler, Chesapeake Energy’s CEO, highlighted the need to “maximize cash flow from our oil assets while reducing capital directed to our natural gas assets.”
Lower natural gas prices in the last decade are the main problem for the company’s financials. In fact, in the 2019 outlook, Chesapeake Energy’s management decided to improve its product mix in oil. Notably, management wanted to only increase the production mix in oil to 26% by the fourth quarter. The production mix in oil was 24.1% in the third quarter. A quarter ago, the figure was at 24.5%.
Chesapeake Energy’s operating margin didn’t change in the last quarter on a YoY basis, as highlighted in the earnings report. Based on the report, the rise in the production mix in oil between these quarters reduced the impact of lower commodity prices on the operating margin. In the third quarter of 2018, the company’s production mix only in oil was at 16.6%. However, reduced cash costs also supported the operating margin.
On a YTD basis, Chesapeake Energy’s stock prices have a correlation of 62.4% with oil prices. The stock prices’ correlation with natural gas prices was at 25.8% as of Monday. Usually, the company has more of an affinity toward oil prices.