Market Overview

Earnings Preview For Chesapeake Energy Corporation (CHK, BRNC, CEO, SWN)


Chesapeake Energy Corporation (NYSE: CHK) is expected to publish its Q1 earnings report on Monday, May 2, after the markets close. Analysts are expecting earnings per share to fall 14.6% year-on-year. Last year, Chesapeake Energy reported earnings of $0.82 per share, while on Monday it is expected to announce $0.70 per share.

Chesapeake Energy Corporation is a producer of natural gas in the United States. The company is focused on discovering, acquiring and developing conventional and unconventional natural gas reserves onshore in the United States. It also has operations in the Granite Wash Plays of western Oklahoma and the Texas Panhandle regions, and in the Mid-Continent, Appalachian Basin, Permian Basin, Delaware Basin, South Texas, Texas Gulf Coast and Ark-La-Tex regions of the United States.

Analysts also expect Q1 revenues to fall 4.3% on a yearly basis to $2.68 billion. Looking ahead, this should not be a year to remember for Chesapeake. In the next quarter, earnings per share is projected to be $0.71, down 5.3% from the last year's level of $0.75. Revenues are expected to grow by 32.3% year-on-year, however, to $2.66 billion. For the year as a whole, earnings per share is projected to be 3.7% down on previous year, while revenues should reach $10.96 billion, an increase of 17% over a year.

Whether or not these estimates will come true will depend on a number of factors. In the near future, investors will be expecting some payoffs from the acquisition of Bronco Drilling Company (NASDAQ: BRNC). As a part of the deal, Chesapeake has agreed to pay $11.00 to Bronco's shareholders. In return, Bronco will be turned into an indirect wholly owned subsidiary of Chesapeake. Chesapeake will most likely be under pressure to show the merit of the acquisition through increased profits in the later part of the year.

Some investors might be curious to know how Chesapeake can respond to the Chinese “threat”. The Chinese companies have been buying world's supplies of raw material very aggressively in recent times. Earlier this year, CNOOC (NYSE: CEO), China's offshore oil and gas producer, said it will pay $570 million for a one-third stake in Chesapeake's drilling project in the Niobrara shale region. In October last year, CNOOC paid Chesapeake $1.08 billion for a one-third stake in a drilling project in South Texas. Maybe Chesapeake can benefit from this co-operation with the Chinese, but some investors might be worried by the fact China's companies are becoming global players, challenging the market position of the established companies like Chesapeake. How well will Chesapeake fare in the rest of the year depends a lot on the movement of prices of oil and gas. Unfortunately for Chesapeake, some analysts believe the prices of oil and gas will not keep rising. One group argues that there is a continued oversupply and low demand for natural gas in the US. Other analysts believe the prices of oil and gas have gone so high they started to crush the demand. Whatever the reason, the prices of oil and gas might be on their way down, which might hurt Chesapeake's short-term earnings.

To see just how far down oil and gas can go, investors will keep a close eye on the Arab world. The revolutions in Arab countries have already eliminated one major producer of oil and gas, namely Libya. The question is if the unrest can spread to more oil producing countries, further crippling the supply of fossil fuels. On the other hand, equally interesting will be to watch for the price of peace. Many Arab oil producing countries, including Saudi Arabia, have increased their social spending in order to avoid protests. Some analysts believe that OPEC will demand higher oil prices in order for its members to fund these social programs.

Some of Chesapeake's rivals, like Southwestern Energy (NYSE: SWN), have performed well this quarter. Investors will be anxious to know if Chesapeake can keep up with its competitors. Last year, Chesapeake has been able to outperform market expectations for all four quarters by as much as 17%.

Rating agencies are generally positive on Chesapeake's near-term future. Seventeen of them currently have a Buy or Strong Buy rating on its shares. Chesapeake's shares have closed at $33.67 on Friday. In the last 90 days, its shares added 23.3% to their value.

Posted-In: Earnings Long Ideas Short Ideas Previews Reviews


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