This Energy Company May Be a Buy
It is an oil and gas E&P company. It is the second largest producer of natural gas in the U.S., and it is the 11th largest producer of oil and NGLs in the U.S.
Last year about this time Chesapeake shareholders demanded change and got it. Aubrey McClendon who at the time was both chairman and CEO, lost his chairman duties and has now been replaced by Anadarko Petroleum (APC) executive Robert Douglas Lawler.
Financials and Growth Opportunities
Chesapeake saw marginal improvement, posting an operating profit of around $217 million during the first quarter. The company spent nearly $20 billion on leases for the last decade and has invested heavily on building its asset base. It is now the largest U.S. onshore leasehold owner. It has been making steady progress by adopting technologies to improve the drilling and production process and increasing efficiencies. It is also one of the most active drillers in North America and is the world's largest driller of horizontal wells. CHK is taking steps to get back on track by concentrating on the core portions of its most important plays, boosting its liquids production, and focusing on improving drilling efficiencies after it reported a sizable operating loss of around $1.7 billion in 2012.
While accomplishing this efficiency improvement, CHK simultaneously improved its safety record to 1.5 million man hours without a recordable injury. This is the work of a well-run company. Many companies would have seen the injury rate go up at such a time. CHK is trading in the $19 to $22 range as of May 2013.
There is a high probability that reduction in oversupply in North America and opening up of export to foreign markets can support a natural gas price between $4/MMBtu and $6/MMBtu in the U.S. Under these prices and with reduced debt after asset sales, CHK could have EPS between $2 and $3 after 2014. Thus CHK offers potential for high reward with high risk.
The company has also earned $0.30 per share over that period, beating estimates of $0.25. The company's current funding gap is estimated to be about $3.5 billion, so even if the company only completes $4 billion more in asset sales this year, Chesapeake should be able to fully fund its operations.
Chesapeake managed to increase its production of natural gas last year by 19% even if management focused more on liquids, which is good news for the shareholders. Chesapeake is clearly getting somewhere with its redone strategy and it should renew with profitability this year.
In the coming years increase in natural gas prices will take place increasing asset valuation and cash flows. Over the next three years natural gas exports will become a reality and would thereby increase cashflows and valuation. Reduced debt and asset sales would help yhe company in increasing its valuation and having a better balance sheet.
The company has set a goal to sell ($4 billion to $7 billion) in assets in 2013. The company is planning to devote 80% of its capital expenditures on drilling and completion of activities in 2013.The company is trying hard to reduce its costs. Production expenses have come down to 18%. With these continual decreases in expenditures the company is expected to save $130 million for the year. It is believed that Chesapeake is working to improve its leverage metrics in 2013 and through 2014 by increasing production and repaying debts. With the increase in production, it is expected to garner in more cashflows and its debt is expected to decline towards $12/boe through the second half of 2013.
The drilling capex of Chesapeake has come down from around $9 billion in 2012 to around $6 billion currently. The company has a commendable liquids production growth track record. Chesapeake expects to allocate more than 80% of its drilling budget for 2013 toward liquids. Chesapeake believes its net asset value, after accounting for non-core asset sales, to be in the $50 billion to $60 billion range — and yet the company is extremely cheap, with shares trading at a deep discount to net asset value.
Energy stocks can be a great way to diversify portfolios and gain exposure to commodities. Selling assets for the next couple years to balance out capital expenditures, production and cashflow will be the key. A lot rests upon the company's ability to be able to sell those assets. We may see the growth of a well-run company if things go right for Chesapeake. It appears that the company has a strong plan to put itself on track.
Chesapeake has done a lot in recent years to make the transition from producing primarily natural gas and concentrating its production towards a mix which also includes oil and NGLs. The company will boost its earnings since prices for oil and NGLs are usually higher than natural gas. CHK should report consistently better results in fiscal year 2013. This ought to push the value of the stock up consistently. Chesapeake gives every indication of being an extremely well-run company. It deserves investors' loyalty, and investors are likely to be rewarded for their loyalty soon.