CTRA - Chesapeake Energy: Natural Gas Is No Longer Needed So It Seems

2023-05-24 13:44:21 ET

Summary

• Chesapeake Energy Corp. reported a first-quarter income of $1,389 million after declaring a loss of $764 million in the same period a year earlier.
• Quarterly Production was 4,069 MMCfe/d or 678.5K Boep/d in 1Q23.
• Chesapeake Energy Corporation declared a $1.18 per share dividend in Q1 2023 and continues to buy back shares.
• I recommend buying Chesapeake Energy Corporation stock between $75.5 and $77 with potential lower support at $72.3.

Introduction

Oklahoma City-based Chesapeake Energy Corporation ( CHK ) announced its first quarter of 2023 on May 4, 2022.

Note: This article updates my September 16, 2022, article. I have followed CHK on Seeking Alpha since Dec. 2019.

CHK is a gas exploration and production company producing assets in the prolific Marcellus, Haynesville, Powder River, and Eagle Ford shale plays. The company's revenues from Natural Gas represent 90% of the total revenues.

One crucial element to consider regarding CHK is its generous dividend policy. The company is paying a quarterly dividend of $1.18 per share, representing a whopping 9.84% yield.

Note: Chesapeake Energy closed more than $2.8 billion in Eagle Ford asset sales YTD. However, the company remains actively engaged with other parties regarding the rest of its Eagle Ford position. In the 10Q filing :

In February 2023, we entered into an agreement to sell a portion of our remaining Eagle Ford assets to INEOS Energy for approximately $1.4 billion, subject to customary closing adjustments. This transaction closed on April 28, 2023 and we received proceeds of approximately $1.055 billion.

However, the Natural Gas price outlook is not bullish, and the next few quarters will be difficult even if the Chesapeake Energy Corporation balance sheet looks solid now.

1 - 1Q23 Results snapshot

Chesapeake Energy Corp. reported a first-quarter income of $1,389 million after declaring a loss of $764 million in the same period a year earlier.

The company posted an income of $9.60 per share, with earnings adjusted for non-recurring costs of $1.87 compared to $ a year earlier. The results beat Wall Street expectations.

Total revenues were $3,035 million, and revenues, including gains on the sale of assets, were $3,370 million.

Finally, Chesapeake Energy Corporation declared a $1.18 per share dividend in 1Q23 and continues to buy back shares. Also, during the three months ended March 31, 2023, CHK repurchased approximately 0.8 million shares under the share repurchase program and had $867 million available under the share repurchase program.

Below are shown the highlights from the presentation:

CEO Nick Dell'Osso said in the conference call:

Our year is off to a strong start. We remain focused on executing on our strategic pillars through our disciplined capital program which maximizes returns and deliver sustainable free cash flow to fund our peer-leading dividend and buyback program. Operationally, we turned in line 53 wells, seeing solid productivity in both the Haynesville and Marcellus, with Haynesville IP90s having improved about 8% from 2022, benefiting from new gas gathering offloads and incremental treating capacity put in place in 2022.

2 - Stock performance

CHK is down 16% on a one-year basis and has slightly outperformed Coterra Energy Inc. ( CTRA ) and particularly The United States Natural Gas Fund, LP ETF (UNG) exchange-traded fund ("ETF").

Chesapeake Energy - 1Q23 Quarterly Financial Table: The Raw Numbers

Source: Chesapeake Energy 10-Q and Fun Trading.

* The cash balance has increased significantly and is $1.2 billion as of 4/30/23. CHK divested two assets in 2022. (From the 10Q filing.)

1. On January 17, 2023, we entered into an agreement to sell a portion of our Eagle Ford assets to WildFire Energy I LLC for $1.425 billion, subject to post-closing adjustments. This transaction closed on March 20, 2023 and resulted in the recognition of a gain of approximately $335 million.
2. On February 17, 2023, we entered into an agreement to sell a portion of our remaining Eagle Ford assets to INEOS Energy for $1.4 billion, subject to post-closing adjustments. This transaction closed on April 28, 2023, and we received proceeds of approximately $1.055 billion. As of March 31, 2023, the assets and liabilities associated with this transaction were classified as held for sale.

Analysis: Revenues, Free Cash Flow, Net debt, And Oil & Gas Production

1 - Quarterly total revenues were $3,370 million in 1Q23

Chesapeake reported a net income of $1,389 million in 1Q23, or $9.60 per diluted share. Total revenues were $3,035 million, and revenues, including gains on the sale of assets, were $3,370 million.

Net income totaled $1,389 million, or $9.60 per diluted share, with an adjusted net income was $1.87 per diluted share.

2 - Free cash flow was $392 million in 1Q23

The generic free cash flow is cash from operating activities minus CapEx.

Trailing 12-month free cash flow ("ttm") is estimated at $2,185 million. The quarterly free cash flow for 1Q23 was $392 million.

CHK repurchased approximately 0.8 million shares under the share repurchase program and had $867 million available under the share repurchase program.

CEO Nick Dell'Osso said in the conference call:

In the face of a volatile market, we generated $350 million of free cash flow, about $240 million when adjusted for asset sales, which will translate to a total dividend of $1.18 per share for the quarter. When combined with our buyback program, year-to-date, we've already returned more than $250 million to shareholders.

3 - Net debt is $1.91 billion in 1Q23

The company reports total debt of $2.040 billion and cash and cash equivalent of $130 million. However, as of 4/30/23, the cash went up to $1.2 billion. The net debt on March 31, 2023, was $1.91 billion.

However, the net debt situation has changed drastically after the divestitures of Eagle Ford assets. CEO Nick Dell’Osso said in the conference call:

As of April 30, we have $1.2 billion of cash on hand and greater than $3 billion of available liquidity. This cash is available to fund our ongoing buyback program, under which we purchased another 1 million shares since our last call bringing our total buyback under this authorization to greater than $1.1 billion with $850 million remaining.

4 - Quarterly Production was 4,069 MMCfe/d or 678.5K Boep/d in 1Q23

4.1 - Produced approximately 4,069 Mmcfe per day net in 1Q23

4.2 - The price per Boe (composite) was $20.69 from $23.79 a year ago.

4.3 - Below is the output in K Boep/d per basin in 1Q23. The company produces from three locations in the USA, with oil production in Eagle Ford.

4.4 - Chesapeake Energy is a domestic gas producer representing 89.8% of the total output for the first quarter 2023.

4.5 - 2023 activity reductions

2Q23: Releasing 1 frac crew in Haynesville

3Q23: Releasing 1 rig in Haynesville and 1 rig in Marcellus

Looking at 1Q23 versus 2Q23, the company expects a 10% decrease in D&C capital and a 5% decrease in Natural Gas production or about 645K Boep/d.

CEO Nick Dell'Osso said in the conference call:

Based on the midpoints of our 2Q guidance, we expect D&C capital to decline approximately 10% and natural gas production from the Marcellus and Haynesville to decline approximately 5% quarter-over-quarter. This decline was part of our plan for the year which is why we reiterated our full year capital and production guidance today.

Technical Analysis (short-term) and commentary

Note: The chart is adjusted for the dividend.

CHK forms an ascending triangle pattern with resistance at $82 and support at $76.7.

Ascending triangle patterns are considered bullish formations, meaning we may cross the $82 resistance. RSI is 59, which means we may be about to cross it.

The trading LIFO strategy that I generally recommend in my marketplace, the "The Gold and Oil Corner," is to sell about 50% between $82 and $84 with possible higher resistance at $86.9 and consider accumulating between $75.5 and $77 with potential lower support at $72.3.

A cautious note: Natural gas price has dropped over 68% YoY, and revenues may be weak in 2Q23 again with potentially lower dividends. Just a careful note.

However, Nick Dell'Osso seems optimistic and confident:

Despite the current market volatility which we do expect to persist, thanks to the premium rock returns and runway of our portfolio, our best-in-class execution, pristine balance sheet and the added financial flexibility provided by our Eagle Ford asset sales, our confidence in the strength of our long-term outlook remains unchanged.

Watch the Natural Gas prices like a hawk.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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