Natural gas major Chesapeake Energy Corporation (CHK) raised its quarterly cash dividend to 8.75 cents per share (35 cents per share on a yearly basis), representing an increase of approximately 17% from its prior dividend. The new dividend is payable on July 15 to shareholders of record as of July 1.
The hike marks Chesapeake’s first quarterly dividend increase since July 1, 2008. The company, which recently reported sharper-than-expected first-quarter results, has bolstered its long-term earnings and cash flow visibility on the back of its leading acreage position in the U.S.
Chesapeake is the second-largest producer of natural gas and holds the industry’s leading position in U.S. acreage (14.3 million net acres under leasehold) and 3-D seismic imaging (28.3 million acres), which estimates potential oil and gas reserves.
The company ended the first quarter with $9.9 billion of debt with a debt-to-capitalization ratio of 39.8% (versus 45% in the preceding quarter). Cash flow from operations in the last quarter increased 11% year over year to $1,404 million.
On one hand, the company intends to reduce its long-term debt (by monetizing its assets and reducing lease-hold spending) by 25% over the course of 2011–2012, while on the other hand, it remains proactive on increasing its natural gas and oil production by the same percentage during the said period.
We think Chesapeake’s focus on shale gas plays should provide the impetus to monetize these assets more effectively and efficiently, thereby boosting returns. Given its industry leading growth profile, competitive cost structure and management’s track record of outperformance, Chesapeake has a competitive advantage in the E&P space over the peers like EOG Resources Inc. (EOG) and Devon Energy (DVN).
However, with natural gas accounting for about 87% of Chesapeake’s production in the quarter and near-term speculations of challenging natural gas fundamentals, we are apprehensive that the company’s results will be vulnerable to fluctuations in the relevant markets. Hence, we believe that Chesapeake will perform in line with the group and maintain our long-term Neutral recommendation for the stock. The company holds a Zacks #3 Rank, which translates to a short-term Hold rating.
CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
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