Chesapeake Energy Corporation recently reported surprisingly good second-quarter results on the back of stronger-than-expected production. During the company's second-quarter conference call CEO Doug Lawler sounded very pleased with the results as well as the direction the company is heading. Here are five things he wanted investors to know about the company's current operations and future plans.
1. We're operating better-than-expectedLawler led off the call by discussing the company's solid operations during the downturn. He said that, "The strong production performance in the first six months of the year positions the Company to enter 2016 at a higher rate than previously forecasted." Further, he pointed out that not only was production strong, but the company's operating costs continue to fall and are down about 8% year-over-year. Because of these strong operations and falling costs, the company is raisingits full-year production guidance while maintaining its current capex budget.
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2. We can overcome our challengesDespite the company's operational strength, it still faces several challenges. Lawler addressed these by saying:
He then went through several options the company has at its disposal to enhance its cash flow and bolster its liquidity, which include "potential asset sales, joint venture agreements, and/or participation agreements" that it expects to complete this year. He said that the company has already had discussions with interested parties and is excited about its prospects.
3. We have several options, but prefer JVsThat said, while the company has several options, it has one clear preference. Lawler said:
One of the reasons he likes the joint venture structure is because it enables Chesapeake Energy to grow by pulling value forward and generating recurring cash flow. That said, he's not opposed to selling non-core assets because that too pulls value forward and gives it the cash to reinvest in new wells elsewhere that would generate cash flow.
4. Why we want to grow in the current environmentWhat was particularly intriguing about Lawler's comments is that he intends to grow Chesapeake's production despite the fact that commodity prices are weak because there's simply too much oil and gas supply on the market. Lawler, however, doesn't see this as being an impediment because the company can still earn strong returns in the current environment. Still, analysts on the call questioned whether that was the right choice as it would seem that holding production flat until prices improve would be the better option. Lawler, however, responded by saying:
In other words, growing even in the current environment is simply the best thing for the company to be doing because the returns are just so compelling as it's accretive to the company over the long-term. That being said, the company would hold back on investing in new wells if it was no longer attractive because it's not going to grow just to grow.
5. Here's our initial thoughts for 2016While Chesapeake hasn't yet put out 2016 guidance, Lawler did give a sneak peek at the company's thoughts for the year ahead. He said:
In other words, the company isn't yet ready to commit on a go forward strategy to either be disciplined and invest within its cash flow or be more aggressive and overspend. A lot of that is because it has options, it could sign a JV agreement or sell assets and bring in a lot of cash. Having said that, it doesn't expect prices to rebound so it still needs to have some discipline, even if it does overspend to grow into an oversupplied market.
Investor takeawayChesapeake Energy CEO Doug Lawler was really pleased with the results his team has been able to deliver in a tough commodity price environment. The company has really reduced its costs, which is making it very compelling to keep drilling even at current prices. That's why the company is looking for other sources of capital as it would like to continue to drill because the returns are still really strong.
The article 5 Things Chesapeake Energy Corporation's CEO Wants You to Know originally appeared on Fool.com.
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