Please ensure Javascript is enabled for purposes of website accessibility

Can Chesapeake Energy’s Q1 Results Give It the Fuel to Maintain Its Red-Hot Run in 2019?

By Matthew DiLallo – May 6, 2019 at 8:02PM

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 producer expects to report its first-quarter number on Wednesday morning.

Chesapeake Energy (CHKA.Q) has been red hot this year. The oil and gas driller's stock has rallied more than 35% thanks to a rebound in the oil market and the company's needle-moving acquisition of WildHorse Resource Development.

Shares could continue running higher if Chesapeake reports strong first-quarter results later this week. Here are three things that would need to be in that report to give the company's stock the fuel it needs to keep rallying.

A drilling rig near a pump at dusk.

Image source: Getty Images.

Earnings need to exceed expectations

Chesapeake's stock caught fire in February after it reported better-than-expected fourth-quarter results. The company posted an adjusted profit of $0.21 per share, which came in $0.03 per share ahead of the consensus estimate due to its strong oil output during the quarter.

Analysts currently anticipate that Chesapeake's earnings will dip a bit in the first quarter to $0.14 per share because of the volatility in the oil market as well as the dilution from the shares it issued to close the WildHorse deal. However, given Chesapeake's recent track record, it wouldn't be a surprise to see the company beat expectations again. If that happens, it could provide the stock with more fuel to rally.

Integration of the former WildHorse assets needs to be going well

Another important thing to watch this quarter is the performance of the recently acquired assets from WildHorse, which Chesapeake has renamed its Brazos Valley unit. The company planned to drill 83 wells on the acquired acreage this year. Ideally, those wells will deliver results in line with Chesapeake's expectations. That would keep the company on track with its goal to grow its oil production by 32% this year.

In addition to that, Chesapeake Energy expects to capture $200 million to $280 million in annual cost savings from the deal. Investors should see how much progress the company made toward that goal during the quarter and whether it remains on track to achieve its longer-term target.

The third area to keep an eye on is leverage. Chesapeake estimated that the WildHorse transaction would help push its leverage ratio down to 3.6 times in 2019 while accelerating the company toward achieving its target to get that metric to around 2.0 times in the future. The company needs to stay on track with this goal, because its massive debt load has been one of the things weighing down its stock in recent years.

It needs to narrow the cash flow gap

One reason Chesapeake has so much debt is that the company has routinely outspent cash flow to grow production. While it has used asset sales to narrow that gap, the company wants to be able to live within its cash flow.

The company initially believed that it would only slightly outspend cash flow this year. However, Chesapeake was evaluating several options to close this gap, which has become more likely thanks to the rebound in oil prices. Hopefully, the company will have found the right balance of efficiency gains and improved performance to put it on track to balance spending with cash flows this year. That achievement alone could send its shares soaring.

Hoping for lots of good news

Shares of Chesapeake Energy have bounced back this year thanks to higher oil prices and the view that its acquisition of WildHorse will move the needle. Because of that, the company's investors have a lot riding on its upcoming first-quarter report. If those results disappoint, shares could give back some of their recent gains. However, if the company posts expectation-beating numbers, makes substantial progress on integrating WildHorse, and has line of sight to start living within its means, then the stock could continue soaring.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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 analyst team.

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 09/26/2022.

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

Premium Investing Services

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