Stressed Out: Chesapeake Energy Earnings Herald Rough 2016

 | Feb 24, 2016 | 12:02 PM EST
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This post was updated on Feb. 24, 2016 at 11:50am EDT to include analyst commentary and more detail from the earnings call.

On Wednesday, Chesapeake Energy (CHK) delivered earnings that were in line with analyst targets but, not surprisingly, were shy of the company's position a year ago.

For the fourth quarter, Chesapeake Energy delivered losses of $0.16 a share on revenue of $2.6 billion, precisely in line with expectations of analysts surveyed by Bloomberg. However, revenue was down 54%, from $5.68 billion a year ago, and the company reported earnings of $0.11 a share then.

"In light of the challenging commodity price environment, our focus for 2016 is to improve our liquidity, further reduce our cost structure and address our near-term debt maturities to strengthen our balance sheet," CEO Doug Lawler said in the company's earnings release.

The companysaid reported that planned capital expenditures for 2016 are $1.3 billion to $1.8 billion, down approximately 57% from 2015 levels. During a call with analysts on Wednesday morning, management acknowledged that the range was wide in order to provide flexibility so that the company can determine what its best investment may be: repurchasing debt or capex spending. Additionally, management said that they were focusing on "shorter cash cycle" projects to better respond to the current commodity price environment and to mitigate the company's current commitments.

On Monday, Moody's downgraded Chesapeake Energy's credit three notches to Caa2 from B2, putting the Oklahoma-based natural gas producer's credit further into "junk" territory. Moody's cited Chesapeake Energy's high debt level and weak liquidity as contributing to the company's "unsustainable capital structure."

Earlier this month, Chesapeake Energy's stock fell below $2 a share on talk that the company had hired outside advisors and was considering seeking bankruptcy protection. There were also concerns that the company would not be able to pay its $500 million note coming due in March.

In its earnings release, Chesapeake Energy affirmed that it will pay the remaining balance on the note with available liquidity. As of the close of the fourth quarter, the company had $825 million in cash, however, it reported that it expected to have $300 million in cash by the end of February -- $230 million was used to pay the March note.

Asset sales are another big part of Chesapeake Energy's 2016 plans. At the end of the second quarter, it said it plans to complete $700 million in asset sales, $135 million of which have closed and are reflected in its current $300 million cash holdings. In addition to $700 million in contracted asset sales, Chesapeake Energy said it plans to divest itself of an additional $500 million to $1 billion in assets. It is focusing on smaller non-core assets.

"The interest level in larger $1 billion plus size asset sales is very low in the current market," Lawler said on the call. "We expect to continue to make progress on several smaller asset divestitures which, when taken together, can add up to a meaningful amount."

Still, while Chesapeake Energy may be making the right moves, analysts at Bank of America Merrill Lynch are still unsure of the company's prospects and maintain an Underperform rating on the stock.

"We still believe it is burdened by too much leverage and by legacy transportation agreements, and that if the strip were to hold true, that the stock has no equity value," Doug Leggate of Bank of America Merrill Lynch wrote in a note released after Wednesday's call.

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with the market getting a bit frothy here, we'll add some put protection. this is 2X normal size BOUGHT SPY...

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