Chesapeake Energy's (NYSE:CHK) stated business strategy is to have one of the largest onshore natural gas and liquids resource base in the United States. Chesapeake was founded only in 1989, but already considers itself the second largest producer of natural gas behind Exxon Mobil (NYSE:XOM). The lowest gas prices in a decade are causing a shift in its near-term strategy, and the current uncertainty has masked the value of its exploration and production (E&P) assets. For more, see E&P Operators Drop Natural Gas PUD's.

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Recent Company Developments
Chesapeake was one of the first firms to announce a reduction in drilling activity in response to natural gas prices that had fallen below $3 per million British thermal unit (btu). It is also reducing natural gas production and shifting from dry gas drilling to liquids assets that are seeing a better pricing environment. Investors have also been concerned with Chesapeake's active investment program and its use of debt to fund many projects. To respond to these concerns, management has announced plans to reduce long-term debt to at or below $9.5 billion by the end of 2012. At the end of 2011, debt stood at $10.3 billion and therefore would require a decrease of roughly a couple of billion dollars. For more information, see Understanding Oil Industry Terminology.

Chesapeake is also quite active in selling off drilling and production assets it has discovered and invested in. In its most recent annual report, CEO Aubrey McClendon boasted of selling assets for $20.5 billion with a net cost of $6.1 billion, for an "overall value creation of $14.4 billion" for shareholders. The world's leading energy players, including BP (NYSE:BP), CNOOC (NYSE:CEO) and Total (NYSE:TOT) have been buyers of certain assets. At the end of the year, Total inked another deal to pay as much as $1.4 billion for an interest in Chesapeake's "liquids-rich" Utica Shale area.

Investment Thesis
An investment in Chesapeake is as much an asset play as it is a vote of confidence in its ability to generate earnings and cash flow for shareholders. The drop in natural gas prices likely means that earnings will fall for all of 2012. Analysts currently project $1.77 per share on a modest 4% sales growth to just over $12 billion. For more information, see What Determines Gas Prices?

The Bottom Line
Analysts project a solid recovery throughout 2013, and year-end profits of nearly $3 per share. They also expect solid top-line gains of nearly 23% for total sales of almost $15 billion. Within a couple of years, the stock could follow suit and eventually rise to over $30 per share, or more than 25% ahead of current levels.

This could just be a warm-up. At the end of 2010, the CEO stated ambitions to achieve a $100 share price by 2015 on a doubling of earnings and cash flow over the five-year period. The recent depression in natural gas prices has likely tempered these lofty growth ambitions, but speaks to the potential of the investment returns over the next few years. To learn more, see Why You Can't Influence Gas Prices.

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At the time of writing Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Tickers in this Article: CHK, BP, TOT, CEO

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