Chesapeake Energy Ends 2018 on a High Note, but Is Cautious Entering 2019

The oil and gas producer delivered a gusher of production to end last year.

Matthew DiLallo
Matthew DiLallo
Jan 9, 2019 at 12:36PM
Energy, Materials, and Utilities

Check out the latest Chesapeake Energy earnings call transcript.

While the fourth quarter was a challenging one for oil companies due to the plunge in oil prices, that slump didn't have any impact on Chesapeake Energy's (NYSE:CHK) operations. That's evident by the company's recent production report, which showed that it exceeded expectations by a wide margin.

However, while Chesapeake finished well, it's taking a cautious approach as it enters 2019 by reducing its activity level so that it can better navigate the renewed volatility in the oil market. That should enable the company to continue shoring up its financial situation while still aiming to grow. 

An oil pump with rocks in the foreground.

Image source: Getty Images.

A strong finish to 2018

Chesapeake Energy estimates that it produced an average of 462,000 to 464,000 barrels of oil equivalent per day (BOE/D) during the fourth quarter of last year. That's well above analyst expectations for 448,000 BOE/D during the period.

One of the highlights during the quarter was the company's oil output, which came in between 86,000 to 87,000 barrels per day, slightly above the analyst forecast for 85,200 barrels per day. What's noteworthy about that number is that it shows that Chesapeake has already completely replaced the oil volumes it lost by selling its assets in the Utica shale earlier in the year. The company was able to do that by delivering strong growth in both the Powder River Basin and Eagle Ford shale.

In addition to its strong operational results, Chesapeake Energy also continued to make progress on shoring up its balance sheet. Thanks to the Utica shale sale, the company reduced its total debt by roughly $1.8 billion last year, pushing it down to $8.2 billion.

Tapping the brakes to start 2019

While Chesapeake delivered strong operational results to end 2018, slumping commodity prices during the fourth quarter are forcing it to scale back to begin 2019 by reducing its rig count from 18 to 14. In addition to that, the company expects efficiency gains to reduce rig costs another 15% to 20% this year. Those cost reduction efforts, however, when combined with the company's focus on drilling higher-margin oil-focused wells, should enable Chesapeake to produce more operating cash flow in 2019 than it did last year even though oil prices have declined.

One of the drivers of that oil-focused growth will be the Powder River Basin, where Chesapeake plans on running five rigs. That activity level will enable the company to more than double its annual net production from the basin compared to last year.

Another big growth driver is the acquisition of WildHorse Resources (NYSE:WRD), which Chesapeake expects to close by the end of the first quarter. That transaction will accelerate the company's efforts to improve its balance sheet while enhancing its growth prospects in the Eagle Ford shale. Chesapeake anticipates that it will run four rigs on WildHorse Resources' acreage this year, matching the company's current activity level on its legacy Eagle Ford acreage.


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The slow progress continues

Chesapeake Energy's strong finish to 2018 caps a solid year that saw it further improve its balance sheet while replacing all the oil production it lost by selling its acreage in the Utica shale. That put the company in the position to acquire WildHorse, which will accelerate its strategy to grow higher-margin oil production as it continues to reduce leverage. 

While the late-year slump in oil prices will force the company to tap the brakes to start 2019, Chesapeake's bold bet on oil via the WildHorse deal could pay off big-time in 2019 if crude prices rebound. On the other hand, the company could get burned by its oil wager if prices sell off again. That makes it an interesting stock to watch, though one that investors should avoid buying until both the oil market and Chesapeake's financials are back on solid ground.