August 6, 2019 / 11:23 AM / 4 months ago

Chesapeake Energy shares tumble on cash flow worries

(Reuters) - Chesapeake Energy Corp’s (CHK.N) shares reversed course on Tuesday to trade down nearly 12% as Wall Street analysts raised concerns about the oil and gas producer’s debt level and the impact of spending on its cash flow.

Worries of Chesapeake overspending come as investors, frustrated with low returns from the energy sector, are pressing oil and gas producers to cut budget and save cash for dividends and buybacks.

Chesapeake, traditionally seen as a natural gas producer, has been moving money from the gas-rich Marcellus Shale and Mid-Continent areas to the oil-heavy Powder River Basin, as an oversupply has pushed gas prices down by 67% in the last five years.

“As we formulate our initial 2020 plans, we expect to allocate more capital to oil-growth areas, with less capital going toward our gas assets,” the company said on Tuesday.

Credit Suisse’s William Featherston, rated five-star for his accuracy on estimates for the company, expects Chesapeake to generate an organic free cash flow deficit of $505 million in 2020 at current prices, compared with a $380 million deficit in 2019.

Chesapeake’s debt, including its acquisition of Texas oil producer WildHorse early this year, stood at about $10.16 billion as of June 30, nearly four times its market valuation.

Sameer Panjwani, an analyst at energy brokerage Tudor, Pickering, Holt & Co, said early commentary from the management on 2020 implied an organic cash flow outspend, which would need meaningful asset sales to plug the gap.

“The market continues to push for E&Ps to move to a free cash flow model and improve balance sheets, and we see CHK as a difficult equity to own until that inflection is made on a sustainable basis.”

However, the company said it was not projecting a “meaningful outspend” in 2020.

Chesapeake, which expects flat capital spending in 2020 compared to 2019, forecast oil volumes next year to grow in double-digit percentage, while gas volumes will decline by the same.

The company’s second-quarter production fell 6.4% to average 496,000 barrels of oil equivalent per day (boepd), but beat analysts’ average estimate of 494,640 boepd.

Chesapeake spent about $559 million in the quarter, 5.5% higher than a year earlier as it increased its well completion activity.

The company posted an adjusted loss per share of 10 cents, while analysts had anticipated a loss of 6 cents. Revenue rose 4.2% to $2.39 billion.

Chesapeake’s shares, which have fallen about a third this year, were down 11.5% at a 20-year low of $1.38.

Reporting by Taru Jain in Bangalore; Writing by Arathy S Nair; Editing by Maju Samuel and Sweta Singh

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