Making Sense of Chesapeake's Recent News
By Investopedia | March 26, 2015 AAA |
This past week, there were two interesting news items relating to Chesapeake Energy (NYSE: CHK). First, earlier this week, the company announced that it was cutting another $500 million out of its 2015 capital budget. Then, around the same time as the capex cut announcement, it was revealed that activist investor Carl Icahn had boosted his stake in the company from 9.98% to 10.98%. While the disclosures are likely not related, both suggest the company is doing the right things to position itself to create value for investors over the long term.
Another cut out of capex
Just one month ago, Chesapeake Energy issued its 2015 guidance for its capex program and production outlook. At that time, the company planned to spend $4 billion to $4.5 billion to grow its adjusted production by 3%-5% in 2015 over last year's level. That spending level was 26% lower than the company spent in 2014, which, at the time, resulted in a 9% boost in adjusted production. However, with no sign that the commodity market is turning around, the company is cutting capex again by $500 million to a range of $3.5 billion to $4 billion, which should result in adjusted production growth of just 1%-3% in 2015.
What this new capex rate will do is enable the company to invest within its cash flow in 2015. That should put an end to analysts' criticisms that the company was overspending on growth at a time when growth simply isn't needed due to the currently oversupplied oil and gas market. Furthermore, it preserves the company's liquidity, which is expected to be $6 billion at the end of this year. That leaves Chesapeake with plenty of capital that it can use to acquire undervalued oil and gas assets from weaker rivals as the downturn continues to linger, or quickly ramp up production when oil and gas prices rally.
A seal of approval
The other piece of news surrounding Chesapeake is the fact that Carl Icahn boosted his stake in the company to nearly 11% of its outstanding shares. While he's not the company's largest shareholder -- that distinction belongs to Southeastern Asset Management at 11.1% -- he is one of the more vocal and well-known of the activist investors. He was also one of the investors who put pressure on the company to push founder and former Chesapeake Energy CEO Aubrey McClendon out the door in 2013.
While he has actively pushed for change in the past, that's not likely the reason that he's boosting his stake in the company this time. Instead, he sees value in the stock, and wants to participate in its future upside.
He recently said, "I believe a great amount of profit in the next few years will be made by those who hold positions in energy companies." His increased stake in Chesapeake Energy would seem to be his way of putting his money where his mouth is while also putting his stamp of approval on its future plans.
Investor takeaway
Chesapeake Energy received a lot of backlash when it originally released its 2015 capex plan, as analysts and investors didn't like its decision to outspend cash flow to grow production while commodity prices are weak. That's why a month later, the company is back with a new capex plan that aligns capex with cash flow. That ensures the company doesn't waste its liquidity drilling new wells that aren't needed at the moment.
Meanwhile, the company also received the seal of approval from a large and formerly vocal shareholder, as Carl Icahn recently boosted his stake in the company. Both pieces of news bode well for the company's long-term future, as Chesapeake will keep its balance sheet in tip-top shape while a key investor is bolstering his position because he likes what he sees from the company, and expects to earn a nice return on his investment.
AI
