Can Chesapeake Energy Handle A Low Natural Gas Price Environment?

seekingalpha04-16

Natural gas prices remain low despite growing demand and expanding export business.Chesapeake Energy announces all-stock acquisition of Southwestern, bringing combined production to 8 billion cubic ...

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Alex Potemkin/E+ via Getty Images Despite growing long-term demand, and a rapidly expanding export business, natural gas prices remain low. Prices are at some of their weakest levels following a warm winter and continued strong production as high oil prices lead to overall production. Chesapeake Energy (NASDAQ:CHK) has built a strong portfolio of assets, and as we'll see throughout this article, can generate strong returns in a low price environment. Chesapeake and Southwestern Chesapeake has announced the all-stock acquisition of Southwestern, bringing combined production to almost 8 billion cubic feet / day, with 15 years of inventory. Chesapeake Energy Investor Presentation The biggest benefit of the acquisition is combining operations to achieve strong synergies. Due to these synergies and the stock-based acquisition, it will be immediately accretive on all financial metrics. It's not surprising to see consolidation in a lower priced environment, and we think it's an opportunistic deal. Chesapeake Performance Chesapeake has continued to perform well despite a tough environment in relation to its $12 billion market capitalization. Chesapeake Energy Investor Presentation The company has a $1.1 billion cash balance and earned $2.5 billion in adjusted EBITDAX in FY23. The company returned $840 million to shareholders versus dividends and share buybacks, a high single-digit yield, and continues to maintain a base dividend of more than 2%. The company's production was at the high end of guidance at 3.4 bcfe / d. The company has exited Eagle Ford and is continuing to sign deals with LNG companies for long-term reliable demand. The company has >15 years of inventory in each basin, and it is focused on long-term asset development. Chesapeake Capital Program The company's capital program remains strong, especially in the company's focus on LNG expansion. Chesapeake Energy Investor Presentation LNG remains massively profitable, and the U.S. remains the most stable jurisdiction for LNG. Europe has moved away from Russian natural gas, and the Middle East remains as volatile as ever. That makes the U.S. the most exciting market for LNG. The company is in a market with >12 bcf/d of finance FID LNG demand by 2028, and it's working to expand this. That will provide reliable multi-decade demand from natural gas, helping to provide a strong floor for natural gas prices. Chesapeake Energy Investor Presentation The above shows the company's capital program, and it's rolling down production in a low price environment. As a result, the company's FY24 guidance is a double-digit production drop in both Marcellus and Haynesville. That comes with minimal capital guidance of $1.3 billion as the company decreases capital expenditures by 20%. The company beat its guidance in 2023, and we expect it to outperform, in a tough market. Chesapeake Market Conditions The company's top issue continues to be a tough market. The company can handle the worst of it with production that continues to be hedged. Chesapeake Energy Investor Presentation The company is building DUCs and deferring TILs throughout the year, maintaining capital and drilling, but not putting the wells into production. The company is building a massive portfolio here, with up to 1.0 bcf/d of production capacity expected to be available by year-end from TILs for <$50 million activation cost. DUCs will provide more at $175 million. This shows the company is prudently managing market conditions, while remaining focused on waiting for prices to improve. Current strip prices are more than $3 / mmbtu for 2025, but that remains to be seen. Market conditions are worth keeping a close eye on for the company at its current valuation. Chesapeake Balance Sheet The company's balance sheet shows its ability to continue driving returns. Chesapeake Energy Investor Presentation The company has $3.1 billion in available liquidity, of which $1.1 billion is cash. The company has very minimal bonds due, with no maturities until 2026 where it has $500 million due at 5.5%. That's an amount the company can comfortably afford with current cash. In 2029, the company has $1.45 billion in debt due at 6.5%. The company's net debt / TTM EBITDAX is 0.4x, or $2.1 billion in total debt, most due in 2029. The debt is far enough out, more than half a decade, and its balance sheet shows its overall strength after emerging from bankruptcy. Chesapeake Energy Investor Presentation The company also maintains a low breakeven cost, despite high capital expenditures of $1.56 billion. That puts the company's capital cost at ~$1.2 / mmbtu for production (in line with depreciation and depletion). The company's 2023 operating costs were low and operating expenses are low as well, with basis at $0.49 / mmbtu. The company's balance sheet shows how it's struggling in the current price environment, but we expect it to continue performing as it cuts capital prices for a better environment. Thesis Risk The largest risk to our thesis is natural gas prices. They've been extraordinarily weak, and Chesapeake Energy has been cutting production. Winters have been weak and high oil prices have supported a massive amount of excess natural gas production. Prices are expected to recover with new LNG capacity, but how that pans out remains to be seen. Conclusion Chesapeake Energy is in a low natural gas price environment where it can't survive forever and drive useful returns at its current valuation. The company has impressive assets with a long lifespan though, a very strong balance sheet, and its acquisition of Southwestern is intelligent. The company is also building up TILs and DUCs, which will help in the immediate term.  We expect Chesapeake Energy to focus on its strong dividend and reliable share repurchases. The company drove high single-digit shareholder returns in 2023, but its ability for future years depends on natural gas prices. We expect prices will do incredibly well with strong LNG demand, but that remains to be seen. Let us know your thoughts in the comments below.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2427876669"}