Chesapeake Energy Corporation Earnings Preview

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Chesapeake Energy is set to release its second quarter earnings report on Thursday before opening bell. The company has received at least one upgrade ahead of that report, but its stock is tumbling as investors react to a report that it is finalizing the sale of its stake in the Barnett shale property. The energy giant’s shares slumped by as much as 5.3% to $4.82 during regular trading hours on Tuesday.

Chesapeake Energy may focus on asset sales

On average, analysts are expecting Chesapeake Energy to post losses of 11 cents per share on $1.91 billion in revenue. However, debt and asset sales continue to be a major focus of Wall Street.

RBC Capital Markets analyst Scott Hanold expects management to talk about spending toward the high end of their capital budget of $1.3 billion to $1.8 billion. The company was previously expected to dump its three rigs in the Eagleford area, but he believes the company maintained its previous levels and even added a rig to the Utica property. Currently, Chesapeake is operating ten rigs, he added.

He notes that last week, Upstream Online reported that the company was in the process of finalizing the sale of its assts in Barnett. He expects this sale and other asset sales to be a topic of discussion on the earnings call on Thursday morning. Through May, the company has closed $1.2 billion worth of asset sales, which is just touching the low end of its target of $1.2 billion to $1.7 billion. He also believes that Chesapeake might have bought Freeport McMoRan’s Haynesville acreage.

He also noted that the energy giant has been proactively managing its liabilities, and he expects another update in the second quarter. He expects the balance sheet and funding the remain the focus on operational updates, noting that it has about $2.2 billion in debt coming due over the next year and a half. Thus far, management has been focusing on exchanging debt for equity, announcing more than $440 million in exchanges in the second quarter. Hanold notes that larger asset sales could fund redemptions.

Chesapeake Energy upgraded

Johnson Rice & Company upgrade Chesapeake Energy to Accumulate, which is a step above Hold but a step below Buy, last week. Their upgrade follows another upgrade from Piper Jaffray earlier this month and a downgrade from RBC last month. Johnson Rice analyst Charles Meade believes the company will “disclose at least a few positive developments from among many possibilities.” He suggests that the market’s surprise at Southwestern Energy’s positive results could be repeated with Chesapeake, noting that Southwestern reported an acceleration in natural gas prices to $3 per thousand cubic foot. He explains that both Southwestern and Chesapeake were “metaphorically left for dead at ~$2/Mcf, but at ~$3/Mcf they both have plenty of life in them.”

One of the positive developments he sees as a possibility that he doesn’t think the market is widely expected is more deleveraging asset sales. Other possibilities are deleveraging acquisitions, reworked commitments for the midstream operations, improved guidance for the second half of this year and production for next year, and an end to the recent debt-for-equity swaps.

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