Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Why Chesapeake Energy Stock Is Getting Clobbered Today

By Matthew DiLallo - Oct 30, 2018 at 12:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The oil and gas driller stunned investors.

What happened

Shares of Chesapeake Energy Corporation ( CHKA.Q ) tumbled more than 12% by 11:15 a.m. EDT on Tuesday after the company agreed to acquire fellow oil and gas driller WildHorse Resource Development Corporation (NYSE: WRD) for nearly $4 billion in cash and stock. In addition, Chesapeake Energy reported third-quarter results.

So what

Staring with the positives, Chesapeake Energy posted solid third-quarter results. The company recorded $174 million, or $0.19 per share, of adjusted net income, which beat analysts' expectations by $0.04 per share. Fueling that stronger-than-expected result was production, which rose 5% year over year, driven by a 13% increase in higher-margin oil output thanks to strong drilling results from the Powder River Basin.

An oil pump next to a pond.

Image source: Getty Images.

However, the company overshadowed its strong quarter by agreeing to acquire WildHorse Resource Development for $3.977 billion, which includes the assumption of $930 million in debt. The transaction will do several things for Chesapeake Energy:

  • It will materially increase the company's oil production and enhance its oil mix. Chesapeake Energy sees its adjusted oil production doubling by 2020 while oil's share of its output will rise from 19% to 30%.
  • It will transform the company's portfolio by adding a new oil growth engine since more than 80% of WildHorse's 420,000 net acres in the Eagle Ford shale are undeveloped.
  • The combination will save the company $200 million to $280 million per year thanks to operational and capital efficiencies.
  • The deal will accelerate Chesapeake Energy's deleveraging by improving its net debt-to-EBITDA ratio to 3.6 next year and 2.8 by 2020, putting it closer to its target of 2.

Now what

While Chesapeake Energy delivered stronger-than-expected third-quarter results and announced a transformational transaction to acquire WildHorse Resource Development, the company is paying a high cost for that acquisition. Given the terms of the deal, current owners of WildHorse will own 45% of the combined company, which is a significant share considering that Chesapeake Energy --- a nearly $15 billion company by enterprise value -- is paying $4 billion for that company. In other words, the transaction significantly dilutes existing shareholders in exchange for a higher oil growth rate and faster deleveraging. While that transaction could pay off over the long term if oil prices continue improving, it could come back to burn the company if crude tumbles.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/09/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.