Chesapeake Energy Corporation (CHK) released production details for Q4 2017 and an outlook for 2018 on Tuesday, and it seems neither analysts, nor investors were pleased. Chesapeake Energy Corporation (CHK) stock tumbled in early trading on Wednesday as its production outlook was weaker than expected.
The energy giant also announced that it was selling some of its Midcon assets for about $500 million, and Credit Suisse analyst William Featherston does feel that it was a fair price for the assets that are being sold. The valuation is at about 7 times cash flow, close to its estimated valuation for 2018 before the deal.
The assets being sold include about 238,000 acres and production amounting to about 23 million barrels of oil equivalent, of which 25% is oil. The assets are being sold in three separate packages, and Chesapeake Energy Corporation (CHK) will use the proceeds to reduce its outstanding borrowings, as it has already utilized about $900 million on its $3.8 trillion revolver as of the end of 2017. The company may also use some of the proceeds to buy back debt with higher coupon values.
Featherston believes Chesapeake Energy Corporation (CHK) may need to divest more large-scale upstream assets in order to “reduce its materially over-levered balance sheet,” which is at more than five times net debt/ EBITDX. Although investors have greeted past asset sales by boosting Chesapeake Energy Corporation (CHK) stock, this time they didn’t cheer the sale, or the fact that the company beat consensus on Q4 2017 production, driven by strength in natural gas.
Chesapeake Energy Corporation (CHK) production reached 593 million barrels of oil equivalent in Q4, compared to the consensus of about 565 million barrels equivalent. Gas volumes amounted to 2.6 billion cubic feet per day, while oil production was about 100 million barrels per day, which was in line with both guidance and consensus.
Featherston was most concerned with the implied Chesapeake Energy Corporation (CHK) production outlook for 2018, which he said were weaker than expected. The company will offer official guidance for this year when it releases its Q4 2017 earnings report on Feb. 22, but it did say that this year’s volumes should be roughly flat with last year’s pro-forma base, which was about 525 million barrels of oil equivalent. That ended up below the comparable consensus of about 541 million barrels equivalent after adjusting for about 23 million barrels equivalent for production from assets that have been divested, Featherston added.
Because implied volumes look lower than expected, he slashed his forecasts for Chesapeake Energy Corporation (CHK) production for this year and next to 533 million barrels of oil equivalent and 547 million barrels equivalent, respectively. The Credit Suisse analyst maintained his Underperform rating and $3 price target for Chesapeake Energy Corporation (CHK) stock.
In intraday trading on Wednesday, Chesapeake Energy Corporation (CHK) stock tumbled by more than 5% to as low as $2.93 per share.