Chesapeake Energy (NYSE: CHK) has been under the gun to make real progress to address its balance sheet woes in light of the steep downturn in oil and gas prices. Investors looking for that progress got just that in the company's fourth-quarter results this morning, which showed surprising progress being made to address a number of its issues.
1. Surprise! We sold a boatload of assets
Chesapeake Energy has been banking on its ability to sell assets in order to give it the cash it needs to address its balance sheet woes and cash flow shortfall. In December it told investors that it was targeting to sell $200 million to $300 million in assets to shore up its cash position. However, in a bit of a surprise the company said that it had signed agreements to sell $700 million in assets that had either already closed or would close by the end of the second quarter. That said, the company would only receive $500 million from these sales because $200 million would need to be used to repurchase three Volumetric Production Payments associated with those assets.
To continue with the asset sale surprise, the company said that it is targeting to sell another $500 million to $1 billion in assets this year to further boost its cash position. The company plans to use the proceeds from those asset sales to buy back bonds, which are currently selling for a significant discount to par value. That will enable the company to not only reduce debt, but reduce its interest burden.
2. Surprise! Growth is history
Another big surprise was the company's 2016 capex plan, which is quite different from its plans of the past. The company only plans to spend $1.3 billion to $1.8 billion in 2016, which at the mid-point is 57% less than it spent last year. Further, that spending level would cause production, adjusted for asset sales, to at best remain flat or decline by as much as 5%.
That's a huge shift for a company that pushed through production growth last year, with its adjusted production jumping by 8% even though it burned through cash and pumped higher volumes into an already oversupplied market. For 2016, however, it is taking a much more disciplined approach, and more in line with the conservative approach we're seeing from shale drillers Devon Energy (NYSE:DVN) and Continental Resources (NYSE:CLR). Devon Energy, which pushed oil production from its core assets up 26% last year, has significantly pulled back the reins in 2016. After cutting its capex budget by 75% over last year, Devon Energy expects its core oil production to be down 3% at the mid-point, while overall production will decline by 6%. Continental Resources, likewise, is significantly reducing its capex, slashing it by 66% over what it spent last year. That will result in a 10% decline in its production, which is a huge reversal for a company that grew its production by roughly 25% in 2015.
3. Surprise! We only have $300 million in cash left
When Chesapeake Energy started 2015 it had over $4 billion in cash and equivalents on its balance sheet. However, after spending $3.6 billion on capex and capitalized interest and buying back nearly $700 million in bonds, the company only had $300 million in cash left in the bank as of this week. Though, the company also has $4 billion available on its credit facility for additional liquidity. Still, the company's cash position has significantly deteriorated over the past year, which is a grave concern.
Having said that, the company has more than enough near-term liquidity to repay the remaining balance of its upcoming March bond maturity. Further, with the asset sales it has planned, plus the production it has hedged well above current prices, Chesapeake Energy has the cash coming in the door needed to fund its 2016 capex plan and to buy back additional bonds in 2016. As such, it would appear that the company isn't facing any near-term liquidity concerns.
Chesapeake Energy was full of surprises this quarter, some good and some bad. The best surprise was the tangible progress it made on asset sales, which came in well above expectations. Further, the company also surprised by finally relenting on production growth after putting out a capex plan that actually allows for a production decline, which makes sense in an oversupplied market. That being said, its cash position fell to a surprisingly low point, which was partially due to bond repurchases it recently made.
Overall, the company doesn't appear to be as financially distressed as the market had feared. Though, it still has much left to do, with its top priority being the next phase of asset sales, with the company ideally hitting its top-end number of $1 billion in sales. The quicker it can hit that number, the more comfortable investors will feel about its financial picture.