Chesapeake Energy Is Starting to Look Like a Turnaround Story

Chesapeake Energy (CHK) reported a surprise third quarter profit before the markets opened Thursday, Nov. 3, posting adjusted earnings of $27 million, or 9 cents per share, on $2.3 billion in revenues. 

And according to analysts, if the Oklahoma City-based oil and natural gas producer can manage to get its targeted asset sales done in a timely fashion, Chesapeake will start to look like much more of a turnaround story going forward.

In the meantime, similarly to the majority of oil and gas companies, Chesapeake continues to squeeze out cost efficiencies to make up for lower commodity prices and troubling oversupply. 

West Texas Intermediate crude oil prices were flat at around $45 per barrel between the second and third quarters, while natural gas prices felt a slight bump, leading analysts to be fairly conservative on earnings estimates for many companies, not the least of which was Chesapeake, a debt-laden, natural gas-levered player currently undergoing a massive restructuring program. 

Analysts surveyed by FactSet had predicted an adjusted earnings loss of 3 cents per share on $2.18 billion in sales. 

Before adjusting for one-time factors, Chesapeake recorded a net loss of about $1.2 billion, or $1.54 per share.

But Chesapeake wrote off $616 million worth of costs incurred from the exit of Chesapeake's 75% stake in its Barnett Shale assets, which the company sold in September to a U.S. unit of French integrated oil major Total (TOT) for $420 million, and a $433 million noncash impairment, largely from lower average oil and natural gas prices in the past year. 

Despite a 33% revenue decline from this time last year and a miss on oil volumes, Chesapeake shares were up Thursday morning. 

Traders may be enthused by the company's ability to post a profit and beat the Street's production estimates by about 4%. 

Chesapeake revised its fourth quarter guidance down, however, to between 550 million and 570 million barrels of oil equivalent per day, 2% below the Street's estimates. 

Still, it expects fourth quarter oil volumes to come in between 90 million and 95 million BOE per day, 4% higher than the Street's predictions of 89 million BOE per day. 

Analysts pointed out Thursday that Chesapeake failed to provide much of an update on its highly anticipated Haynesville Shale asset sale, which is expected to garner between $700 million and $1 billion. 

Instead, the company noted that it added 72,500 net acres and about 55 million cubic feet of natural gas production in the Haynesville Shale for $85 million during the third quarter. 

Chesapeake did say it continues to focus on select asset divestitures and has earmarked assets for sale by year-end, including a portion of its Haynesville Shale properties.

On a conference call with analysts, the company said it has an announcement coming before year-end for one package in the Haynesville, while it has "just opened" a data room on a second property package, as well. 

Chesapeake said in its statement that it also has divested the majority of its upstream and midstream assets in the Devonian Shale located in West Virginia and Kentucky, which includes about 882,000 net acres and 5,600 wells. 

Chesapeake did not disclose a valuation for the sale, but said it plans to repurchase one of its two remaining volumetric production payment transactions, after which any net cash proceeds from the Devonian asset sale will be "nominal."

A volumetric production payment, or VPP, transaction is a financing deal used in the oil and gas industry in which the owner of an oil and gas property sells a percentage of their production in exchange for an upfront cash payment. Following the repurchase, Chesapeake will no longer be obligated to provide any portion of their production to the other party involved. 

Meanwhile, Chesapeake continues to work on deleveraging its balance sheet. The highly debted oil and natural gas producer said it has significantly reduced its near-term debt maturities in the past year. 

Indeed, Chesapeake has made some progress, ensuring its ability to pay its debts through 2018 with a bond sale that closed earlier this month and raised $1.25 billion. 

The debt market's confidence in Chesapeake became evident as it was able to raise more than the $1.1 billion target in the bond offering, and that target had already been upsized from the $850 million the company initially expected to raise. 

Chesapeake was also able to secure a relatively modest interest rate on the new unsecured convertible notes at 5.5%, which puts it between the rates on two of its existing longer-dated bond issuances: the 4.875% senior unsecured notes due April 15, 2022, and the 5.75% senior unsecured notes due March 15, 2023.

As of Sept. 30, Chesapeake's debt principal balance was about $8.7 billion, including about $240 million under its $4 billion first-lien revolving credit facility due Dec. 19, 2019. The debt load compares to the $9.7 billion Chesapeake owed long-term as of Dec. 31, 2015, and the $11.7 billion it owed as of Sept. 30, 2015. 

Kirkland & Ellis LLP and Evercore Partners Inc.'s Daniel M. Aronson are advising the energy producer on its capital structure options.

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