Summary
- Chesapeake is about to report its Q4 earnings on Tuesday, after the market closes.
- A discussion of natural gas prices right now being at a 30-year low, after adjusting for inflation.
- Chesapeake's capital return program, how investors should think about this.
Investment Thesis
Chesapeake ( CHK ) will report its Q4 results and discuss its outlook for the year ahead on Tuesday. With natural gas prices trading in the bargain basement, investors have ample reasons to feel wobbly. However, I describe to investors how they should think about the present state of the natural gas market.
Moreover, I believe that when CHK reports its Q4 results on Tuesday after the close, CHK will spotlight 3 bullish considerations that investors should focus on. CHK will discuss,
- Its balance sheet;
- Hedges;
- Capital returns.
So, this too is what we'll discuss.
Natural Gas Prices Fall Dramatically, What Now?
Natural gas prices have slumped to the lowest in years. That's a fact that we can see reflected below.
The outage of the Freeport LNG export facility predominantly drives this. Thus, this translated into excessive inventory in the US, which by extension caused natural gas prices in the US to drop to a 30-year low, after adjusting for inflation .
Put another way, if you think about a scale where natural gas prices in the US in 2022 are at one end, today's prices are firmly on the other end.
All that being said, let's not forget the underlying drivers for US-based natural gas. Natural gas in the US is priced at multitudes lower than in Asia and Europe.
The problem right now is getting the natural gas out. But recall, not only has Freeport LNG started to export significant LNG volumes right now. But in 2023-2024, the Golden Pass export facility is expected to increase LNG export volumes by about 29%.
CHK investor presentation
CHK Q4 Results
In the first instance, CHK will impress upon its investors that despite natural gas prices right now being extremely depressed, as we've discussed in the above section, CHK is in a very strong financial position.
More specifically, CHK holds a net debt position of 0.4x net debt to EBITDA.
As you can see above, CHK's balance sheet is arguably the strongest when compared to its peers.
Next, we'll discuss CHK's hedges.
Hedging Program
In the image that follows we can see CHK's hedges.
What we see here is that CHK's book is about 60% hedged for Q1. However, we'll need to see how CHK's hedges have been updated for the remainder of 2023. This is one area that investors should pay particular attention to on Tuesday night.
Capital Returns Program
As of Q3 2022, CHK had around $900 million allocated for share repurchases in 2023. This comes close to a 10% return simply from its buyback program. This is after the $1.1 billion used to repurchase stock since the program started in early 2022.
In sum, CHK is not only announcing its intention to repurchase its shares, but it's actually leaning on its excess free cash flows to repurchase its shares.
But there's more. On top of its share repurchase program, CHK also has a base dividend and frequent special dividends. Admittedly, the base dividend of 2.8% yield isn't going to get anyone's heart racing.
But on top of this small dividend, CHK also has a regular special dividend.
To repeat, the special plus base dividends above are contingent on the strength of the underlying natural gas market.
My point here is not to predict what the special dividends will amount to in 2023. Rather it's to remind readers that whenever conditions return to strength, CHK is the sort of company that eagerly returns capital to shareholders.
The Bottom Line
When Chesapeake updates investors on Tuesday, even if its capital return payout right now is not that alluring, investors should absolutely stick with their investment.
If I were to focus on one particular area for CHK's Q4 results, it would be to hear an update on how CHK's hedged book for 2023.
On balance, there's a lot to be excited about here.
For further details see:
Chesapeake Q4 Preview: What To Look For