Chesapeake Energy Corporation (CHK) reported earnings this morning and held a conference call. Sterne Agee CRT states While we wait for the 10-K and continue to digest some of the updated figures, here we provide some quick takeaways. We note that our Sterne Agee CRT colleague, Tim Rezvan, covers the equity with a “Neutral” rating, and we have been focused on the Company’s bonds.
Below is some more coverage from analysts on Chesapeake Energy Corporation:
Chesapeake Energy Corporation – Sterne Agee CRT
The Company had $700 million in asset divestitures closed or under signed sales agreements which it expected to close by the end of Q2; this may be a surprise as the only thing we had seen publicly out there (before FourPoin press release today) was the $128 million purchase announced recently by a buyer of $128 million of CHK’s royalties in non-op wells. CHK also spent ~$200 repurchasing three volumetric production payments (we think associated with the properties it was trying to sell), reducing net proceeds to $500 million. The Company is also targeting/has “line-of-sight” an additional $500 million – $1.0 billion in asset divestitures in 2016. It appears that this is made up of several small sales.
Chesapeake Energy Corporation is leaning hard on its well backlog. The 2016 CAPEX budget of $1.3– 1.8 billion (incl. capitalized interest) is down 50–64% YoY. The CAPEX plan is in line with our initial $1.5–1.6 billion model. Using our 2016 $40/ $2.50 commodity outlook, we model a FCF deficit of $1 billion that will be funded with asset sales and the bank revolver. The 2016 budget is aimed at shorter-cycle projects, with 70% of capital directed to well completions. CHK plans to operate 4–7 rigs to drill 85–125 wells but complete 280–350 wells. The company nearly halved its 480 uncompleted wells backlog.
We’re revising our Chesapeake Energy Corporation estimates following the company reporting 4Q15/2015 results before market open and providing the 2016 game plan on capital spending and production growth. Included was discussion on additional asset divestitures totaling as much as $1.0B, proceeds of which would go to pay down debt (LTD 6x current market capitalization; 2017 and 2018 maturity debt trading at 37, on average). Focus this year is on completion activities (70/30 spending split completions/new drills)and short-cycle projects, underscoring the immediate need to manage liabilities,perhaps at the detriment to capital efficiency in the out periods. Changes to our model reflected in our revised estimates contained herein show a still-sharp decline in the production growth profile. Product mix tilts further to natural gas; ~78% of modeled 2016 gas production is hedged. Leverage remains elevated on those same assumptions (BMOCM price deck applied). This supports the negative loop in thatwe find the company: can’t afford to grow or cut fast/deep enough to neutralize the impact of low commodity prices, however much open market purchases of debt at a discount may help, for example. This may be true for others.
Chesapeake Energy Corporation highlighted its liquidity and additional options at its disposal, such as unencumbered assets which were pledged to the company’s collateralized hedge facility and could be pledged to the credit facility syndicate. The credit facility has $3.9bn of undrawn capacity (combined with $300 mm in cash (end of Feb.) and $365mm net in asset sale proceeds to come) implying liquidity of $4.6bn. Clearly, there is reduced pressure on near-term funding concerns, in our view. Attention will turn to additional divestitures and timing ($385mm announced post call – Western Anadarko).
Despite $135MM in closed asset sales,Chesapeake Energy Corporation’s net debt is ~$9.2bn (up from $8.9bn at YE15). CHK expects to receive another $365MM of asset sale proceeds by end of 2Q & it is targeting an additional $0.5-$1.0bn in asset sales this year. But Chesapeake Energy Corporation is on pace to chew through its entire current liquidity position (>$665MM of pro-forma cash & $3.9bn available under its revolver although its credit facility is at risk of being reduced in April) by YE17 given: 1) $260MM 3.25% note maturing on 3/15/16; 2) ~$1.8bn of maturities in 2017 (includes ~$1.05bn of puttable convertible notes); 3) a potential $439MM litigation risk from a July 2015 ruling it is appealing; & 4) ~$2.3bn of FCF deficits in 2016-17E at current strip prices (assuming capex stays flat YoY in 2017).
Chesapeake Energy Corporation – Deutsche Bank
With investors and management clearly focused on the debt burden, CHK’s time of possession will mostly be on the defensive side of the ball in 2016. Although the backlog draw down and base optimization will provide offensive support to cash flow and volumes, continuing to divest non-core assets ($500- 1,000MM above the current ~$700MM announced) will be the priority with balance sheet improvement the driver of equity, in our view. With execution of the divestitures, we see CHK with enough capital for the $1.3-1.8Bn guidance while reducing the ~2016/17 maturities, but the ~$1.2bn 2037 converts (putable at par 11/17) will continue to keep the pressure on.