Chesapeake Energy Corporation Earnings: What to Expect Wednesday

Climbing earnings and a bold new strategic vision could drive new interest in the energy producer's stock.

Feb 25, 2014 at 12:00PM

Chesapeake Energy (NYSE:CHK) will release its quarterly report on Wednesday, and investors expect to see substantial growth in earnings and revenue from year-ago levels. Like EOG Resources (NYSE:EOG), Continental Resources (NYSE:CLR), and other independent oil and gas producers, Chesapeake has emphasized production of oil and liquids over natural gas in recent years, but the rise in natural-gas prices over the past several months could well present a new opportunity for the company as it considers a major strategic move with its oilfield-services business.

Chesapeake was once a market darling of the energy industry, with its extensive natural-gas assets dominating its competitors and looking to capitalize on quickly rising prices for natural gas. Yet the gas glut that overtook the industry with the rise of shale-gas assets sent natural-gas prices plunging, forcing Chesapeake, SandRidge Energy (NYSE:SD), and other formerly gas-centered producers to make an about-face in their business strategies. As markets now shift back into a more balanced state, the big question facing Chesapeake is which direction to take going forward. Let's take an early look at what's been happening with Chesapeake Energy over the past quarter and what we're likely to see in its report.

Chk
Source: Chesapeake Energy

Stats on Chesapeake Energy

Analyst EPS Estimate

$0.41

Change From Year-Ago EPS

58%

Revenue Estimate

$4.69 billion

Change From Year-Ago Revenue

32%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance

Can Chesapeake earnings keep growing this quarter?
Analysts have actually pulled back on their views on Chesapeake Energy earnings in recent months, reducing fourth-quarter estimates by $0.03 per share and cutting full-year 2014 projections by more than 10%. The stock has nevertheless climbed 8% since mid-November.

Chesapeake's third-quarter results confirmed the turnaround that the company has worked so hard to achieve. Chesapeake boosted revenue by 64%, with a $0.24 per share profit reversing a year-ago loss with the help of rising prices for both oil and natural gas. Although overall production fell slightly, oil output grew by 23%, reflecting the shift Chesapeake has made away from dry gas toward liquids. Natural gas now makes up only about a third of Chesapeake's overall revenues as a result of sales of nat-gas assets, which is consistent with similar moves that SandRidge and other players in the industry have made in recent years.

But looking forward, investors aren't as certain about Chesapeake's opportunity for further growth. According to its recently released outlook for 2014, the energy company expects a 1% drop in natural-gas production, offset by 3% gains in oil and a 43% boost in gas liquids. Even though Chesapeake believes that production costs will drop 10%, that cloudy production outlook wasn't received well by shareholders, especially in combination with expectations that the company will cut capital expenditures for exploration, production, and maintenance by 20%.

Still, Chesapeake is making efforts to become as efficient as possible. By using some of the same strategies that Continental Resources and EOG Resources have used, Chesapeake has reduced its well costs and reduced its rig counts. Given that the company remains highly leveraged, these cost reductions are important to preserve Chesapeake's balance-sheet strength.

Chesapeake revealed another plan to restructure its operations just yesterday, saying that it's seeking strategic alternatives for its oil-field-services unit. By divesting itself of its rigs and its drilling and fracking services offerings through a spinoff or sale, Chesapeake could better focus on its exploration and production efforts and improve capital allocation between the two units. The move also shows the difference in strategy that new CEO Doug Lawler has had since taking over for former CEO Aubrey McClendon, looking for ways to be both shareholder-friendly and smart in getting Chesapeake leaner and meaner going forward.

In the Chesapeake earnings report, watch for more explanation of how a Chesapeake Oilfield Services spinoff might affect the continuing oil and gas business. With conditions looking better, especially in the natural-gas realm, Chesapeake could be in prime position to take maximum advantage and return to the profitability it once enjoyed.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Chesapeake Energy (NYSE: CHK) will release its quarterly report on Wednesday, and investors expect to see substantial growth in earnings and revenue from year-ago levels. Like EOG Resources (NYSE: EOG), Continental Resources (NYSE: CLR), and other independent oil and gas producers, Chesapeake has emphasized production of oil and liquids over natural gas in recent years, but the rise in natural-gas prices over the past several months could well present a new opportunity for the company as it considers a major strategic move with its oilfield-services business.

Chesapeake was once a market darling of the energy industry, with its extensive natural-gas assets dominating its competitors and looking to capitalize on quickly rising prices for natural gas. Yet the gas glut that overtook the industry with the rise of shale gas assets sent natural-gas prices plunging, forcing Chesapeake, SandRidge Energy (NYSE: SD), and other formerly gas-centered producers to make an about-face in their business strategies. As markets now shift back into a more balanced state, the big question facing Chesapeake is which direction to take going forward. Let's take an early look at what's been happening with Chesapeake Energy over the past quarter and what we're likely to see in its report.

Stats on Chesapeake Energy      

 

 

Analyst EPS Estimate

$0.41

Change From Year-Ago EPS

58%

Revenue Estimate

$4.69 billion

Change From Year-Ago Revenue

32%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Can Chesapeake earnings keep growing this quarter?
Analysts have actually pulled back on their views on Chesapeake Energy earnings in recent months, reducing fourth-quarter estimates by $0.03 per share and cutting full-year 2014 projections by more than 10%. The stock has nevertheless climbed 8% since mid-November.

Chesapeake's third-quarter results confirmed the turnaround that the company has worked so hard to achieve. Chesapeake boosted revenue by 64%, with a $0.24 per share profit reversing a year-ago loss with the help of rising prices for both oil and natural gas. Although overall production fell slightly, oil output grew by 23%, reflecting the shift Chesapeake has made away from dry gas toward liquids. Natural gas now makes up only about a third of its overall revenues as a result of sales of nat-gas assets.

But looking forward, investors aren't as certain about Chesapeake's opportunity for further growth. According to its recently released outlook for 2014, the energy company expects a 1% drop in natural-gas production, offset by 3% gains in oil and a 43% boost in gas liquids. Even though Chesapeake believes that production costs will drop 10%, that cloudy production outlook wasn't received well by shareholders, especially in combination with expectations that the company will cut capital expenditures for exploration, production, and maintenance by 20%.

Still, Chesapeake is making efforts to become as efficient as possible. By using some of the same strategies that Continental Resources and EOG Resources have used, Chesapeake has reduced its well costs and reduced its rig counts. Given that the company remains highly leveraged, these cost reductions are important to preserve Chesapeake's balance-sheet strength.

Chesapeake revealed another plan to restructure its operations just yesterday, saying that it's seeking strategic alternatives for its oilfield services unit. By divesting itself of its rigs and its drilling and fracking services offerings through a spinoff or sale, Chesapeake could better focus on its exploration and production efforts and improve capital allocation between the two units. The move also shows the difference in strategy that new CEO Doug Lawler has had since taking over for former CEO Aubrey McClendon, looking for ways to be both shareholder-friendly and smart in getting Chesapeake leaner and meaner going forward.

In the Chesapeake earnings report, watch for more explanation of how a Chesapeake Oilfield Services spinoff might affect the continuing oil and gas business. With conditions looking better, especially in the natural-gas realm, Chesapeake could be in prime position to take maximum advantage and return to the profitability it once enjoyed.

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Click here to add Chesapeake Energy to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


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