...A Bigger Dividend Is on the Horizon. -- Barrons.com
BY Dow Jones & Company, Inc.
— 11:24 AM ET 11/03/2021
The new Chesapeake Energy ( CHK) is making the most of the high energy prices resulting from supplies industrywide coming back more slowly than demand in the recovery from the Covid-19 pandemic. The natural-gas producer delivered a stronger- than-forecast third quarter and lifted its 2021 and 2022 profit guidance on Tuesday. Investors can also count on more generous dividends under a formula for setting payments unveiled by management this year.
Chesapeake stock added more than 3% in Wednesday morning trading, to about $67.50. Tuesday evening, Chesapeake reported adjusted earnings per share of $2.38 -- or $269 million -- comfortably exceeding the Wall Street consensus of $1.68.
Under generally accepted accounting principles, the company had a net loss of $3.51 per share last quarter. But that includes a $6.29 per share unrealized loss on hedges for changes in oil and natural-gas prices. The $6.29 represents marking to market a portfolio of derivatives to reflect soaring energy prices, and isn't a cash cost. So the adjustment is fair, as far as these things go, and the EPS outperformance definitely counts as a beat.
"We're focused on executing the strategy we've articulated," said Chesapeake CEO Nick Dell'Osso on Wednesday morning's earnings call. "Behind our disciplined capital allocation approach and continued focus on our cost structure, we intend to increase free cash flow, enhance our scale, and return significant cash to shareholders."
Barron's recommended buying Chesapeake stock late last month. The shares returned 5% from when our article ran through Tuesday's close, versus a 3% rise for the Russell 2000, 2% for the S&P 500, and less than 1% for S&P 500 energy stocks.
Total revenue was $890 million in the third quarter. Chesapeake said it earned $519 million in adjusted Ebitdax, or earnings before interest, taxes, depreciation, amortization, and exploration expense, a common profit measure in the oil and gas business. Thanks to the high oil and gas prices, management lifted their 2021 Ebitdax guidance Tuesday by $200 million, to $2.0 billion to $2.1 billion.
Next year, the company now expects to earn $3.2 billion to $3.4 billion in adjusted Ebitdax, versus their prior forecast of $2.55 billion to $2.75 billion. Free cash flow was $265 million in the quarter and net debt was just 0.2 times Ebitdax.
High prices mean Chesapeake can earn more without spending more on exploration and development. Management's 2021 and 2022 capital- expenditure forecasts remained flat, despite the higher call on earnings.
West Texas Intermediate crude-oil futures have been trading around $84 a barrel lately, near seven-year highs and up 75% year to date. Natural-gas futures have been in the $5.50 per million British thermal units range, at levels not seen since 2008 and up some 120% this year. That comes out to about $5.70 per million cubic feet, which is how Chesapeake reports its production. Prices began the third quarter at around $3.79 per million cubic feet.
Chesapeake produced almost 2.1 billion cubic feet of natural gas per day in the third quarter -- more than Wall Street expected -- sold at an average price of $3.61 per million cubic feet, and with an average realized price of $ 2.61. It has natural gas swaps for 167 billion cubic feet for the fourth quarter, at an average price of $2.66. That's part of the hedging program put on earlier this year that lost value on paper in the third quarter as natural gas prices soared.
Chesapeake's 2022 hedging includes 474 billion cubic feet at an average of $2.67 per million cubic feet. That covers somewhat less than half of management's expected production of around 1.11 trillion cubic feet of natural gas next year. It gives Chesapeake plenty of exposure to the higher natural gas prices we're seeing, but guarantees revenues on the downside if prices crash.
That stability informs Chesapeake's new dividend policy, which consists of an annual base dividend of $1.75 per share, paid quarterly, plus 50% of the previous quarter's free cash flow. Hedging protects the base dividend, with the variable dividend reflecting the company's recent performance. The new dividend policy goes into effect as of next quarter.
Chesapeake also said this week that it completed the acquisition of Vine Energy, with holdings in the Haynesville shale and other areas.
Write to editors@barrons.com
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Let's cut right to the chase and 'do the math' regarding CHK's dividend policy. At the bottom of slide 3 of CHK's latest presentation, they project that between now and '25 they will generate about $6B of free cash flow, based on 10/29/21 strip pricing. That works out to an average of $1.4B (i.e. $6B/ 4.25 yrs.) per year. After the Vine merger they have 117M shares out but let's nudge that up to 125M to account for some likely warrant exercises and to make the math easier. The dividend policy is to pay out half of the free cash flow, so that would mean $700M or $5.60/share. Add in the base dividend and you get total dividends of $7.35/share, or about an 11% return going forward. Not too shabby. The other question is, what are they going to do with the $3B of free cash flow that they are not dividending out? That far exceeds their debt.
The New Chesapeake Energy Is Scoring With High Gas Prices...
Re: The New Chesapeake Energy Is Scoring With High Gas Price
2.61 is what they realized vs 5.55 current market
Why would you buy them when you can buy CLR which is netting
A higher number
Why would you buy them when you can buy CLR which is netting
A higher number