On Dec 16, 2015, we issued an updated research report on Chesapeake Energy Corporation (CHK).
Chesapeake remains one of the industry’s most active players in managing its asset portfolio through a combination of acquisitions and disposals. With a bigger inventory of unconventional resource potential than probably any other domestic independent, Chesapeake boasts a leading position among the top unconventional liquids-rich plays. The company holds acreage in Eagle Ford, Utica, Granite Wash, Cleveland, Tonkawa, Mississippi Lime and Niobrara and in the Marcellus, Haynesville/Bossier and Barnett natural gas shale plays.
Chesapeake has increased its production guidance for 2015 to 640–650 thousand barrels of oil equivalent (MBoe) per day from 635–645 MBoe per day. The company foresees remarkable cost-cut efforts as well as efficiency gains in its core operating areas. Chesapeake has the deepest inventory in the preeminent part of the Utica shale as well as some of the finest locations in the Eagle Ford and Marcellus shale plays. These are likely to help the company in achieving its target.
Chesapeake is on track with its plan of reducing long-term debt through the monetization of its assets and cutting lease-hold spending. This monetization initiative is mainly aimed at coping with the mounting debt level. The initiative would also fill the funding gap for its 2015 expenditures that resulted from volatile natural gas prices.
Additionally, the company announced a cut in its 2015 capital spending. This should help Chesapeake improve cash flows as pricing weakness continues to weigh on financials. Despite the 26% investment cut, the company expects production to grow about 3–5% from last year.
Since natural gas accounted for over 70% of Chesapeake’s 2014 production, results are particularly vulnerable to fluctuations in the natural gas market. The company – which is the second-largest natural gas producer in the U.S. – has been in the news as it is struggling to fund its capital budget amid diminishing cash flows in a weak natural gas price scenario.
Though Chesapeake’s ongoing asset monetization initiatives are working well, the company’s balance sheet is still more leveraged than its peers. At the end of the third quarter, the company’s debt balance was $10.7 billion, which represents a debt-to-capitalization ratio of 68.0%.
Chesapeake’s oil exposure, though limited, further increases bearishness on the stock as the commodity has plunged over 50% since June last year. With crude prices anticipated to remain weak throughout 2015, financials are likely to remain pressed.
Stocks to Consider
Chesapeake currently has a Zacks Rank #3 (Hold). Some better-ranked stocks from the same space are Energy Transfer Equity, L.P. ETE, ReneSola Ltd. SOL and Boardwalk Pipeline Partners, LP BWP. All these stocks sport a Zacks Rank #1 (Strong Buy).
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