Chesapeake Energy (CHK, Financial) announced a revised spending and capital expenditure plan for 2015 on March 23 and I maintain my positive view on the stock after the announcement. This article discusses some of the key highlights of the plan and the reasons to remain bullish on the stock.
From a previous guidance of $4.0 to $4.5 billion, Chesapeake Energy has revised the capital expenditure plan to $3.5 to $4.0 billion. After adjusting for 2014 asset sales, the revised capital expenditure plan would result in production growth of 1% to 3% for 2015. Considering the point that oil prices remain weak, the production growth target can still be considered to be good. Even if Chesapeake Energy clocks the same production as FY14, I believe that the overall performance can be considered as strong for the year. Therefore, moderate production growth for FY15 even after a revision in capital expenditure is the first reason to be positive on Chesapeake Energy.
The second reason to be positive about Chesapeake Energy is the company’s strong liquidity position that is likely to be maintained through 2015. The company interest 2015 with a strong liquidity position that was achieved through asset sales and with undrawn revolving credit facilities. According to the revised investment plan release, Chesapeake Energy is likely to close 2015 with a cash and undrawn credit facility position of $6 billion. I believe this is a big positive factor as it implies that Chesapeake Energy will have enough liquidity to meet the capital expenditure requirements even for 2016.
Another important point that I want to discuss here is the company’s financial strategy. With a strong cash position, Chesapeake Energy is not going overboard and this is evident from the point that the company expects to be free cash flow neutral by the end of 2015. In other words, the company’s capital expenditure has been revised downwards in order to meet the investments needs through internal cash flows. I believe that the company will leverage further only when oil prices trend higher and sustain at higher levels. The prudent financial strategy that also involves opportunistic asset sales implies that Chesapeake Energy can navigate the lower oil and gas price crisis with relative ease. With escalating geo-political tensions in the Middle-East, oil and gas prices can surprise on the upside sooner than expected.
While I have spoken of operating factors, current valuation is also another important factor to be bullish on Chesapeake Energy. Even if the stock might not surge higher anytime soon, I believe that an EV/EBITDA of 2.73 implies that the stock is worth accumulating at current levels with a 3-5 year investment horizon.
In terms of risk factors, lower oil and gas prices for a sustained period is the biggest risk. Even if Chesapeake Energy has enough financial flexibility for capital investments in 2015 and 2016, lower energy prices can impact the company’s cash flow and long-term financial flexibility. Further, the company might be forced to sell more assets in order to maintain a healthy balance sheet. However, even with this risk, the stock is worth considering and accumulating at current levels.
