Chesapeake Energy Corporation (NYSE:CHK) stock seems to have stabilized today after tumbling on Thursday following the company’s third-quarter results. One would have thought that the Chesapeake Energy 3Q17 earnings beat would’ve been good news, but it was paired with something investors have no patience for right now: increased capital expenditures.
Chesapeake Energy 3Q17 earnings beat wasn’t enough
It seems investors just aren’t in the mood to let higher spending fly as even Facebook stock has been struck for that despite the strong earnings beat. Unfortunately for Chesapeake, it already has quite a lot of debt, so when investors heard that it wants to increase spending, even an earnings beat wasn’t good enough to make up for it. On the other hand, a few, like Tesla, can get away with doing the very same thing for an extended period while running at a loss. Oil just isn’t as sexy as electric cars, after all.
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Chesapeake Energy 3Q17 earnings came in at 12 cents per share, excluding items, which beat the consensus by a penny. However, the company’s revenue fell 14.6% year over year to $1.94 billion, which missed the consensus of $2.07 billion. Production was down 15%, although Chesapeake warned about that in September. Volumes came in at 542 million barrels of oil equivalent per day. The company also said that production growth would be flat to modest next year.
Chesapeake also raised the bottom of its guidance range for capital expenditures for this year by $200 million, although it said it plans to spend less next year. The company’s long-term debt is still close to $10 billion, and it continues to chip away at that balance slowly, this time by selling another $2 billion to $3 billion in assets to support its balance sheet.
Price target for Chesapeake Energy stock cut
Barclays analyst Thomas Driscoll slashed his price target for Chesapeake stock following the third-quarter earnings release. He reiterated his Underweight rating and slashed his price target for Chesapeake Energy stock from $3 to $2 per share. He also said the Street was looking for about 8% growth in production for next year, meaning that the guide for “flat to modest” growth just fell flat on investors.
Further, he said that this production guide with an estimated one-third reduction in capital expenditures next year will leave the company $300 million to $350 million short of covering its budget using cash flow. In Driscoll’s view, the Chesapeake Energy 3Q17 earnings results demonstrate that the company has made progress, but he also believes that it is “poorly positioned relative to peers, leverage remains challenging, and it needs to sell assets to cover its overspend.”
Chesapeake Energy’s debt is too heavy
Jefferies analyst Mark Lear also rates Chesapeake Energy stock at Underperform, and he already had a $2 price target on it. He feels that the company’s debt burden is just “too heavy” for the asset base that it has. He pegs Chesapeake’s outspend at about $450 million next year based on the current futures pricing, and he estimates that the company will outspend its cash flow by about $100 million in 2018. He added that without a rally in commodities, a much bigger asset sale or “greatly enhanced well returns,” the company will continue to be in a difficult position. He thinks the best course of action would be to sell off “an entire operating area” with the goal of generating enough cash to “right-size” its balance sheet.
Chesapeake Energy stock slipped by another 0.27% to $3.64 on Friday and is no down by nearly 7% since the third-quarter earnings release.