Chesapeake Energy (CHK):

Case study set up (2014 base year)

Ellen Carr

The Art of Forecasting

April 2018
 Why Chesapeake (CHK)?

● Poster child for the excesses of the oil and gas cycle
● Illustrates the difficulty of forecasting cyclicals
– Outside CHK’s control:
• Oil markets
• Shale explosion
– Within CHK’s control:
• Cost structure bloat/shrink
• Liquidity issues (borrowing base adjustments)

● Illustrates the difficulty of analyzing strategic changes when the

cycle turns against a company
– New CEO (3/13) with aggressive debt and cost reduction plans

● Cross-capital structure perspective

– Swing for the fences with leverage, or
– Raise liquidity at shareholders’ expense?

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 Why CHK?
Natural gas and stock trajectory (2007-2014)

Natural gas

CHK stock

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Why CHK?
Balance sheet is in the wrong place for the cycle

4
Why CHK?
How the high yield market underwrites a cycle

5
Why CHK?
Credit rating

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CHK: Learning objectives

● Consider history
– Is history a good guide—or misleading?
● Handicap your odds of forecasting success
– Is there any visibility?
– How wide are the confidence intervals?
● Factor in cost cutting to arrive at break-even oil/gas price
● Consider “below the FCF line” options (debt, equity, asset sales)
● Forecast over a time horizon of your choosing
– 3 years—but ok to choose the over or under on this
– Consider CHK’s liquidity position and debt maturities
● Decide how many scenarios you want to run
● Compare your level of confidence/conviction to prior forecasts

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CHK: Deliverable (1): Model (2014 base year)

● Create your own!

– Start with the HUN template and enhance as needed, or

– Build a new model more accommodating of cyclicals

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 CHK: Deliverable (2): Narrative (with supporting numbers)

● Assumptions— ● Where could we be ● Confidence ● Comparison to mgmt.

narrative/numbers wrong? level guidance
– Revenue – Narrative – Narrative – Narrative
– Margin – Impact on – Impact on – Impact on
– Cash flow inputs: numbers numbers numbers

• Capex

– Anything else

Up to 2 pages of text + model (if not presenting)

Up to 5 PPT slides + model (if presenting)