Earnings Quality Report: Chesapeake Energy Corp. (NYSE: CHK)

CHK-US reported relatively weak net income margins for the last twelve months (-4.5% vs. peer median of 10.4%). However, the company booked a level of accruals that is around peer median (44.3% vs. peer median of 40.6%) for the same period, suggesting that its reported net income is supported by a reasonable level of accruals.

CHK-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. However, this level of accruals is also around the peer median and suggests the company is recording a proper level of reserves compared to its peers.

We assess the impact of various categories on the cash flow of the company by performing a variance

analysis. For each category, this variance analysis measures the movement between the current and previous periods, normalized for the size of the company (e.g. days outstanding or percentage of revenues). This normalization eliminates any movement attributable to period-by-period growth and helps isolate the impact of any accounting policy changes the company might have made in recording the values in each category.

The chart on the right shows the impact of the top accounting categories on Chesapeake Energy Corp.’s cash flow for the current quarter. We consider both positive and negative impacts on the cash flow since the categories could have either decreased or increased the reported net income.

The table below details the impact of the major accounting categories on Chesapeake Energy Corp.’s net operating cash flow for the current quarter. While we have identified the major accrual categories, and conduct several tests on this standardized set, it should be noted that companies can sometimes have a non-standard accrual item that has a higher impact on the difference between net operating cash flow and net income.