Chesapeake, Encana soar as cost cuts trump $20 billion in losses

Investors shrugged off $20 billion in losses and rewarded two of North America’s biggest natural gas producers on Wednesday for slashing costs and shutting down drilling rigs.

Chesapeake Energy Corp. and Encana Corp. rose 23 percent each — the biggest gains for the companies since 2008 and 1983, respectively. Despite reporting quarterly and full-year losses on Wednesday, shareholders cheered managements’ belt-tightening amid one of the worst gas markets in more than a decade.

Gas has lost almost 90 percent of its value since December 2005 as the shale revolution sparked in north Texas spread and supplies expanded across the continent. The furnace and power-plant fuel is selling for less than $2 per million British thermal units, down from more than $15 in late 2005. The decline has forced the entire industry to write down the value of its assets. For 2015, Chesapeake’s annual loss was $14.7 billion; Encana’s was $5.2 billion.

“Investors are rewarding companies for making the hard decisions” so theycan survive the downturn, Kyle Preston, an analyst at National Bank Financial in Calgary, said Wednesday in a telephone interview. “No one’s paying for growth in this market — that’s only going to make the problem worse.”

- FWBP Digital Partners -

Chesapeake rose to $2.69 in New York. After closing out 2015 as the year’s worst performer in the Standard & Poor’s 500 index, Chesapeake led the index on Wednesday. Encana increased to C$5.09 in Toronto.

Chesapeake, which pumps more U.S. gas than any producer other than Exxon Mobil Corp., announced it will pay off the remainder of a half-billion dollar debt that’s coming due in three weeks. The Oklahoma City-based explorer said it will use proceeds of $700 million in asset sales that were more than twice as large as the company forecast in December.

Chesapeake plans to sell another $500 million to $1 billion in properties this year, according to a statement on Wednesday. The company is cutting its drilling budget by 57 percent this year and shutting down at least half the drilling rigs it has under contract, all in a bid to conserve cash needed to whittle down its debt load.

Stung by the drop in gas prices, Chesapeake took advantage of investor concern about its ability to cover debts by purchasing at discounted rates about $240 million of the 3.25 percent senior notes due next month, according to the statement. The company has also been buying up bonds that mature in 2017 for 45 percent less than their face value, further reducing future demands on its cash flow.

- Advertisement -

Chesapeake’s “tactical focus areas” for the year include selling assets to raise cash and repurchasing bonds, Chief Executive Officer Doug Lawler said in the statement. About 70 percent of capital spending will be invested in finishing already-drilled wells rather than starting new ones, he said — a less expensive way to sustain output.

The deals being negotiated now range in sizes from $10 million to $500 million each, Lawler said during a conference call with analysts and investors Wednesday. Sales in the $1 billion or more range are rare in the current market environment, he said.

Lawler irked some observers by ending the conference call after about 30 minutes, half the length of a typical Chesapeake quarterly earnings call. Tim Rezvan, an analyst at Sterne Agee & Leach Inc., said that by “abruptly” terminating the call, the company left unanswered questions about pipeline commitments, unfinished wells, hedging activity and financial assumptions underlying its reserves data.

Chesapeake posted a fourth-quarter net loss of $2.2 billion, or $3.36 a share, compared with a profit of $639 million, or 81 cents, a year earlier, according to the statement.

- Advertisement -

Encana CEO Doug Suttles said the Calgary-based company is “relentlessly” pursuing cost-cutting. “The world taking on North America better get ready because this part of the planet knows how to get efficient and you’re seeing it every day,” he said during a conference call with investors on Wednesday.

Encana plans to spend $900 million to $1 billion this year, a 55 percent decline from 2015 and lower than the $1.5 billion-to-$1.7 billion range disclosed in December. The quarterly dividend was reduced to 1.5 cent a share from 7 cents. Job reductions this year mean Encana will have cut its workforce by half since 2013.

The company reported a fourth-quarter net loss of $612 million compared with net income of $198 million a year earlier, according to a company statement on Wednesday. Excluding one-time items, the 13-cent-a-share profit beat the 1-cent average of 18 analyst estimates compiled by Bloomberg.

Almost all Encana’s drilling budget will be directed to the company’s four primary assets, the Eagle Ford and Permian in the U.S. and the Montney and Duvernay in Canada.

While Encana has aspired to pump more crude oil and gas byproducts that fetch higher profits than gas, about 90 percent of its production was from gas in 2014. Profit margins for the fuel are below those of its peers as Encana has allowed costs to creep up, according to Chris Feltin, an analyst at Macquarie Capital Securities in Calgary.