Chesapeake Energy Corporation (CHK, Financial) has announced its plans to reduce its 2015 capital budget by almost 10%. The American oil and natural gas company is the latest company to do so following in the footsteps of other energy companies. This move had to be taken due to the recent fall in the prices of oil. Due to the drop in the prices of energy, other energy firms have decide to stop their capital spending in a bid to save billions of dollars.
Why the cut?
Chesapeake Energy Corporation said that they would reduce their drilling cost mainly in response to the low commodity price environment. This cost would be reduced by yet another $500 million. Therefore, the expected costs that is to be incurred by the company for drilling wells should be somewhere around $3.5 to $4 billion. The previous guidance for the year 2014 was $4.0 to $4.5 billion. CEO Doug Lawler said 2015 has been a favorable year as the company maintained a strong liquidity position. Besides, he also revealed his intentions to manage the strong liquidity position in a very good and careful judgmental manner. By December 2015, Chesapeake expects a combined cash and borrowing capacity of $6 billion under its existing credit facility. Now that the spending is revised, the company anticipates being free cash flow neutral by the end of this year. Last year, the Oklahoma-based company conducted its operations from sixty-four rigs. This year, the numbers have dropped by 55%, to 25 to 35 rigs. The production of oil this year is expected to be around 231 million to 236 million barrels equivalent. This production would reflect an increase of 1% to 3% as compared to last year. This estimate is a reduced figure as compared to the company's announcements in February. Chesapeake was shooting to produce around 235 to 240 million barrels of oil equivalent this year. Last year, officials close to the matter even said that if prices would increase, the company would increase their drilling expenditure. Sadly, the estimated plans did not work out in the company's favor.
Impact on shareholders
Shares of the natural gas company rose 0.6% in recent after hours trading. Though it is not very clear to what extent shareholders will be affected by the announcement, Chesapeake shares are not reaping benefits to its full capacity. The share value fell 43% last year. Chesapeake announced net income of $1.27 billion or $1.87 per fully diluted share, for the entire year 2014. Adjusted EBITDA was reported at $4.945 billion for the same period. However, for the year 2013, the adjusted EBITDA was $5.016 billion. The fourth quarter 2014 saw the company's adjusted EBITDA at $916 million. This was a steep drop as compared to the EBITDA of $1.132 billion for the same quarter in 2013.
Conclusion
The drop in crude prices is playing havoc to all energy companies in the U.S. West Texas Intermediate crude saw a gain of $0.88 on Monday, IE at $47.45 a barrel. As compared to the oil price of $107.95 in June 2014, the price on January 28, 2015 fell to $44.45. This was a massive drop of around 59%, giving no other choice to energy companies other than slashing their capital costs. Just last week, the oil prices witnessed a drop to $43.88. In 2014, the company had announced that the crude oil promotion would slow down that year. The announcement created an immediate negative impact on the shares. Clearly,investors and shareholders were disappointed. Chesapeake can now only wait for commodity prices to increase so as to witness an increase in its share value.
