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On 23/05/2018, I wrote my initial article on Chesapeake Energy (CHK) and since then it has been a grueling race for shareholders, myself included. CHK generated momentum and, in the second half of 2018, the carpet was swept away, despite continuous quarterly beats, evidence of a real turnaround and a poorly received acquisition. I have averaged the costs over and over because I believe in the direction that management takes, even though the chart does not represent progress. The day before yesterday, there were good things to come because the CHK is well on the way after the loss of the first gains for some time. Prior to marketing, CHK was down and I was expecting a bloodbath, but after the conference call and income information was digested, CHK found a positive state. I believe that the current share price offers new investors the opportunity to generate positive returns and a respectable level compared to the average dollar cost of current shareholders if you believe in the direction that CHK management is positioning the company. I am still a long time on CHK, as management makes the right decisions by making difficult decisions and by drawing a global picture of energy, which indicates an increased use of fossil fuels in the near future.
(Source: TD Ameritrade, Think or swim)
The acquisition of WildHorse fits perfectly into Chesapeake's portfolio and creates the expected synergies
In November 2018, when CHK announced its intention to acquire WildHorse, it pointed out that this decision would increase oil production by about 2X by 2020, increase the percentage of oil composition by about 60% by the end of 2020, to reach 30%, and would generate between Savings of $ 1.5 billion through efficiency gains by 2023. After dissecting CHK's first quarter of 2019, its predictions from six months ago were accurate and we are only at the beginning. The acquisition of WildHorse, now known as the Brazos Valley business area for CHK, has eliminated costs of approximately $ 500,000 per well since 01/01 / 2019. CHK has saved over $ 1 million on some of the individual wells in the training. Additional savings are anticipated through faster drilling and increased fracture simulation steps performed daily. CHK also reduced its operating expenses, on an absolute basis, by $ 81 million, or $ 0.18 per boe.
The Brazos Valley property was a strategic game to increase CHK's diversification into natural gas oil. So far, CHK's outlook for oil in 2019 is on track as, in the month of April, CHK was on the verge of achieving 32% oil growth with a blend ratio of oil of about 26%. The average daily oil production in the first quarter of 2019 was 109,000 barrels, which represents a 5% increase in one year to approximately 22% of CHK's energy mix at the company level.
CHK's investments increased by $ 16 million, but this is needed for future growth
In the first quarter of 2019, capital expenditures increased from $ 543 million to $ 559 million year-over-year. Even though investment spending has increased by almost 3%, this money has been spent to increase production over the coming quarters and years. The total gross number of rigs, well spud, completed wells and connected wells increased compared to the first quarter of 2018 and some substantially. CHK's operating activity has all increased, with the average number of rigs increasing 33.3%, wells 2.6%, wells completed up 9.2% and wells connected increased by 45.6%. The CHK is subject to financial discipline, but the expenses required to build on the 484,000 boe of the first quarter, which were produced.
(Source: Steven Fiorillo) (Data source: CHK presentation for the first quarter of 2019)
Highlights in Industry as CHK Transition Increases Exposure to Oil
The Brazos Valley operates in the northern part of the Eagle Ford and Austin Chalk shales in Texas. On the Easy Rider platform, CHK launched its first starter management test, which generated better results. The two wells of the rig completed lateral work approximately 7,500 feet long and reached oil production peaks of 898 barrels per day and 1,546 barrels per day, representing an increase of 35% compared to estimates for the region. CHK drilled and completed its first set of four Eagle Ford wells on the bell pad. These wells were put into production in April 2019. The average production rate continues to increase and has reached a 24-hour oil production peak of 2,723 barrels of oil. CHK optimizes these wells with lower fluids and greater volumes of sand, which will reduce costs over time while increasing productivity.
CHK has four rigs in the area and has put 13 wells into production, including five gas and eight oil in the first quarter. CHK expects to commence production of 27 four-gas and 23-oil wells in the second quarter of 2019. CHK anticipates that the 2019 drilling program in the Brazos Valley will average an average strike length of 9,000 feet per well. 27% increase compared to 2018. This should lead to continuous improvements in the coming quarters, as longer sideways and optimized completions result in higher capital efficiency and higher returns. The assets of the Brazos Valley are expected to generate positive cash flows in 2019, with a current production mix of 75% oil, 11% NGL and 14% gas on 470,000 acres, of which 80 to 85% are not yet developed.
CHK's Eagle Shade asset in South Texas, Eagle Ford Shale, generates free cash flow, as well performance is incredibly strong. CHK has four rigs and put 29 wells into production in the first quarter of 2019 and plans to put 16 additional wells into production in the second quarter. This asset is expected to generate free cash flow of $ 450 million, with production mix currently at 56% oil, 22% NGL and 22% gas on 235,000 acres.
The Powder River Basin (PRB) is an engine of petroleum growth for CHK, with projected oil production growth of 100% in 2019. In the first quarter, CHK witnessed several severe weather events that resulted in significant downtime in the PRB. Average production in the first quarter was about 36,000 boe per day, including 16,000 barrels of oil. In April, the average production of the PRB rose to 39,000 boe per day, while oil rose 12.5% to 18,000 boe. As of May 1, this figure rose to 42,000 boe per day and oil reached 20,000 barrels of oil. 13 wells were put into production in the first quarter, and 15 wells are expected to be put online in the second quarter in the PRB. In addition to increased production, CHK has connected electrodes to a new oil collection pipeline system that will transport these fuels to Guernsey, Wyoming. The system will be fully operational throughout the PRB by June 2019 and will result in cost savings. The long-term perspective is that CHK will use this system as an entry point into interstate pipelines to deliver these fuels to Cushing Oklahoma in the summer of 2019 and to the Gulf Coast markets in Corpus Christi by the end of 2020.
(Source: CHK Q1 presentation)
The overall picture of energy settles well for CHK and others in space
The world is using more energy as Third World countries industrialize and the world population increases. BP (NYSE: BP) said energy demand would continue to grow significantly until 2040, led by China and India. The demand for gas and oil will continue to grow, as sustainable energy is needed to make life easier, as we know it. The EIA predicts that the United States will become a net exporter of energy after 2020 and that net exports of natural gas will continue to grow until 2050. This has been reported by the United States. EU supports the EIA projections, US exports of liquefied natural gas (LNG) to Europe have increased by 272% since July 2018. On May 3, Dave Keating of Forbes announced that the company's exports of liquefied natural gas (LNG) to Europe have increased by 272% since July 2018. The EU planned to increase LNG imports from the United States to 8 billion cubic meters per year by 2023, an increase of more than 100% from the levels recorded in 2018.
(Source: BP Energy Outlook 2019 Edition)
The recovery in oil prices and some interesting developments could make CHK an excellent partner for dance
By the end of October 2018, oil seemed to fall off a cliff as it was approaching 40 dollars a barrel. In 2019, we saw a rebound in oil, which has remained above $ 60 a barrel on the WTI since the end of March. Recently, Berkshire Hathaway (NYSE: BRK.A) made a $ 10 billion investment in Occidental Petroleum Corp. (OXY) while seeking to acquire Anadarko Petroleum Corporation (APC). Buffett was willing to invest $ 20 billion to help OXY conclude the deal with Anadarko and said that Berkshire Hathaway's $ 10 billion investment in Occidental Petroleum constituted a bet on oil prices at long term. The BRK.A investment in OXY indicates that they believe at least in oil recovery, which should do wonders for energy producers as global energy demand continues to grow. 39; increase.
Chevron Corp. (CVX) reached an agreement to acquire Anadarko for $ 33 billion in cash and stock purchases, and OXY won with Berkshire. CLC stated that the agreement signed with Anadarko offered the best value for the shareholders of APC. If APC decides to get into the dance with OXY instead of CVX, she will have to pay CLC a break-up fee of $ 1 billion if she gives up her original contract. At present, you have two leading players, OXY and CLC, looking for acquisitions to strengthen their positions in an energy market where demand continues to grow. Chevron was attracted by APC for its Permian exposure, which adds to its 2.2 million net acres. CLC expects their net oil equivalent production to reach 600,000 b / d by the end of 2020 and 900,000 b / d by the end of the year 2023.
Eagle Ford and Austin Chalk may not be the Permian, but the area owned by CHK would increase Cox's net area in Texas by about 32%, as it owns 470,000 net acres in the Brazos Valley, 80 of which 85% are undeveloped and 235,000 net acres in South Texas. In the first quarter of 2019, the BRV produced 47 Mboe / d, and South Texas, 110 Mboe / d. CHK would be a partner of choice for CVX if the deal with APC failed because CVX would gain six major assets in the US and use APC's money to finance part of the deal.
(Source: OilPrice.com)
The risks of investing in CHK
CHK is a highly speculative stock, and you must have a strong stomach to be a part of this business. As a shareholder, there is not only sun and roses. CHK is dependent on natural gas, which has been sold at the prices of future CHK hedges. If the price of natural gas does not improve before hedging, CHK may find itself in a difficult situation as its income is likely to drop significantly. The price of oil could also experience another dip based on geopolitical tensions and an increase in oil production and supply in the countries. CHK also has a debt of about $ 9.98 billion and, without significantly increasing its free cash flow, this could pose a serious problem to CHK. Fortunately, the CHK has time because none of its debts are due in 2019, while in 2020, only $ 302 million is due. CHK has some time to improve its operations before 2021, when an unsecured debt of $ 293 million and $ 668 million from the revolving credit facility resulting from the BVL purchase expires. If management can not keep its promises, it may need to sell an asset to clear its balance sheet.
(Source: CHK Investor Presentation, Q1 2019)
Conclusion
The road has been long and painful for CHK's shareholders before the first quarter of 2019. I continue to believe in CHK's management team and the direction in which it is heading. CHK has world class assets and has done a tremendous job filling many holes in a sinking ship. Right now, CHK is afloat and has a new life by increasing its exposure to oil. I think that the world energy situation is well organized for energy companies, and CHK should benefit from an increase in demand that should stabilize and gradually raise oil and natural gas prices. I was very wrong on this one, which forced me to average the costs several times. Although I think that CHK would be a great acquisition for someone you can not invest in this hope, I am convinced that the markets will recognize that CHK is worth much more than its current price, and the sale that is not worth it. it has not happened, hopefully, is a validation of that. It could have been very serious, but maybe the right people recognize a rough diamond with CHK. I think if you have an iron belly and you can handle volatility, there is money to be made in CHK.
Disclosure: I am / we have been CHK for a long time. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose shares are mentioned in this article.
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