Chesapeake Energy Corporation CHK and Southwestern Energy Company SWN – with a respective market capitalization of $2.9 billion and $2.6 billion – define the U.S. independent exploration and production space.
Both these companies are engaged in the exploration and production of oil and natural gas. But how do you choose between the two? Here’s a look at the recent stock performances by Chesapeake Energy and Southwestern Energy.
Run in the Markets
Both Chesapeake Energy and Southwestern Energy have underperformed the S&P 500 over the past one year, with the Chesapeake Energy stock falling approximately 77% against Southwestern Energy’s 74%, compared with the S&P 500’s loss of only 5.6%. Of course, these numbers are from the time when oil sank into a bear market. The most notable victim of the commodity meltdown has been shareholder return – gone for even energy majors like Royal Dutch Shell plc RDS.A and BP plc BP.
Chesapeake Energy now trades at about 73.5 times trailing 12 months earnings and 50.9 times forward earnings for 2017, while Southwestern Energy is valued at 9.4 times trailing 12 months earnings and about 13.3 times forward earnings for 2017.
3Q15 Performance
As an indication of the toll that low commodity prices are taking on the industry, Chesapeake reported adjusted third-quarter 2015 loss per share from continuing operations of 5 cents, reflecting a massive deterioration from the year-earlier profit of $0.38 per share. Southwestern Energy also reported similarly, with third-quarter 2015 adjusted earnings of a penny per share deteriorating substantially from the prior-year quarter earnings of 50 cents.
Production
Chesapeake Energy and Southwestern Energy are facing dwindling returns aptly showed by sharply falling realizations.
Chesapeake’s daily production for the third quarter averaged approximately 66.7 million barrels of oil equivalent (MMBoe), reflecting a year-over-year increase of 3%. Average daily production consisted of approximately 114,100 barrels (bbls) of oil, 2.9 billion cubic feet (bcf) of natural gas and 76,200 bbls of NGL, representing year-over-year increases of 4%, 2% and 7%, respectively. Oil equivalent realized price in the third quarter was $15.45 per Boe. Average realizations for natural gas were $1.14 per thousand cubic feet (Mcf) and oil was sold at $62.68 per barrel.
During the reported quarter, Southwestern Energy’s oil and gas production surged 27% year over year to 249 billion cubic feet equivalent (Bcfe). The upside was driven by increased Appalachian production. The company’s average realized gas price for the quarter, including hedges, fell to $2.21 per Mcf from $3.43 per Mcf in the year-ago period. Oil was sold at $33.50 per barrel, significantly below the year-earlier level of $97.71 per barrel. Natural gas liquids were sold at $4.72 per barrel, down from $35.57 in the year-ago period.
Capital Expenditure
In the third quarter of 2015, Chesapeake’s total reported capital expenditure of $623 million, including capitalized interest of $99 million, decreased 35% and 59% from second-quarter 2015 and third-quarter 2014, respectively. The debt balance was $10,674 million, representing a debt-to-capitalization ratio of 68.0%.
As of Sep 30, 2015, Southwestern Energy had approximately $4.6 billion in long-term debt, representing a debt-to-capitalization ratio of 51.2% (compared with 42.2% in the prior-year quarter). During the first nine months of the year, Southwestern invested a total of $1.4 billion. This is lower than $1.8 billion invested in the corresponding period of 2014.
Cash Flow
Chesapeake Energy’s cash flow from operations during the first nine months of 2015 came in at $1.1 billion compared with $3.8 billion in the year-ago period. The decrease was primarily the result of lower realized prices for oil, natural gas and NGL. This was partially offset by realized gains on derivative instruments and decreases in operating expenses. Similarly, Southwestern Energy’s cash flow from operations was $1.2 billion versus $1.8 billion in the year-ago period.
Bottom Line
Chesapeake Energy and Southwestern Energy are two of the best-run companies within the exploration and production space. Both are focused on improving their debt levels which poses a bit of worry. Both are actively managing their asset portfolio through a combination of acquisitions and disposals.
However, with a bigger inventory of unconventional resource potential than most other domestic independent players, Chesapeake boasts a leading position among the top unconventional liquids-rich plays. Both companies have also played it smart by raising their production guidance for 2015 and focusing on minimizing their capital expansion plans for the near future.
To sum up, neither Chesapeake Energy nor Southwestern Energy – carrying a Zacks Rank #2 (Buy) and a Zacks Rank #3 (Hold),respectively – have been spared the ills of the crude price slide. But going by their size, reserve base and Zacks Rank, Chesapeake Energy seems to be in a relatively better shape.
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