After going on a tear earlier in the year, shares of Chesapeake Energy (CHKA.Q) have come back to earth over the past few weeks thanks to a string of disappointments. While the market initially reacted favorably to its decision to unload its entire position in the Utica Shale, analysts widely panned the move. On top of that, the company posted lackluster second-quarter results.
However, while Chesapeake might have had some recent disappointments, CEO Doug Lawler was decidedly optimistic on the company's second-quarter conference call. Here are three reasons he believes the company has a bright future.
Image source: Getty Images.
We're not the same company we once were
Lawler led off the call by summarizing some of the company's recent wins:
Chesapeake continued to build upon the transformational momentum established over the last several years through consistent operational and financial improvements. The announcement of our Utica divestiture is yet another step that demonstrates our commitment to achieve and sustain top quartile performance among our peers.
He went on to state that:
We have fundamentally transformed all aspects of the company in the last 5 years. With closure of the Utica transaction, we have eliminated $12.2 billion in total leverage, lowered our annual gathering, processing, and transportation expense by approximately $900 million, while erasing over $10.3 billion in additional midstream and downstream commitments. We've reduced our CapEx cumulatively by more than $12 billion, while keeping adjusted production relatively flat, and removed over $1 billion of annual cash costs.
This combination of debt and cost reductions have put the company on much stronger financial footing for the future, all but removing the possibility of declaring bankruptcy that was present a couple of years ago.
We're starting a new phase
Still, Chesapeake's weaker financial position forced it to spend much of its energy the past few years shoring up its balance sheet so that it could survive the oil market downturn. However, the days of focusing on staying afloat are now in the past with the sale of the company's Utica position. Lawler stated that it "marks the conclusion of Chesapeake's strategy of asset sales being the primary driver of debt reduction," even though he also pointed out that the "strategy was necessary, given the debt profile of the company."
With that focus on asset sales in the rearview mirror, the company is starting a new phase to achieve its targeted leverage level by shifting its focus to "organic production growth, exploration, strategic acquisitions, and portfolio management," according to Lawler. These efforts will "drive us to achieve our ultimate goal of improving our leverage ratio to 2.0 times net debt to EBITDA," which is about half of its current level of around 4.0 times debt to EBTIDA.
Image source: Getty Images.
This is how we will achieve our new strategy
As Lawler noted, organic growth will be a key driver for Chesapeake going forward. He stated that: "We expect our diverse portfolio to deliver 10% adjusted oil production growth in 2019, and additional growth is anticipated for 2020 ... principally driven from our Powder River Basin asset."
He then drilled down a bit deeper into that position:
We believe the production growth and trajectory of the Powder River Basin is now fully evident. Thanks to optimized completions and customized facility design, we recently reached net production of 32,000 barrel oil equivalent per day (BOE/D). And while we currently anticipate our production will reach 38,000 BOE/D by year-end, we've already increased our net oil production in the Powder River Basin by 90% year to date, with additional growth that will come from a further 28 turn-in-lines anticipated for the remainder of the year.
Chesapeake has delivered stunning production growth from this region in the past few months thanks to its focus on drilling into the Turner formation. As Lawler notes, oil production is already up 90% this year and should continue growing as it completes 28 more wells by year-end. Meanwhile, the company expects oil output from the region to double in 2019 from this year's average as it continues drilling at a fast pace.
There also appears to be ample untapped upside in the region. As noted, Chesapeake has currently just focused on the Turner formation. However, rival EOG Resources (EOG 0.26%) recently revealed encouraging drilling results in the Mowry and Niobrara shale plays. Those wells lead EOG Resources to believe it can drill more than 1,800 high-return wells on its acreage in the region, unlocking an estimated 2.1 billion BOE of resources. That's a stunning 10-fold increase from EOG's initial assessment of the Powder River Basin based on its Turner potential. Those discoveries by EOG Resources as well as the renewed focus on the region by other large drillers suggest that Chesapeake could have significant upside as it explores its acreage.
The glimmer of hope is growing brighter
The sale of Chesapeake Energy's Utica Shale position marks a key turning point for the company's strategic plan. While it still has some work to do given its elevated debt level, the company made significant progress and put together an action plan to take it to its desired destination. Add that to its Powder River Basin upside, and Chesapeake Energy's future is beginning to brighten.
