Chesapeake Stuns the Market

Submitted by Wall St. Daily as part of our contributors program

Chesapeake Stuns the Market

By Karim Rahemtulla, Chief Resource Analyst

I love to say, “I told you so . . .”

I’ve seen the signs of Chesapeake Energy’s (CHK) success since October 2012, when CHK shares were in the low $20s.

Since that time, the company has shown its ability to consistently navigate around the many obstacles in the natural gas and LNG markets.

As a result, the stock jumped to more than $31 this past June.

Now, shares have returned to the low $20s on the back of a decline in natural gas prices.

But don’t fret. The company has risen from the ashes yet again . . .

New Sheriff Commands Order

Chesapeake has always been a natural gas producer first . . .  and a liquids producer second.

That reasoning was justified a few years ago when then-CEO Aubrey McClendon went on a multi-billion-dollar land-buying spree that left the company more than $15 billion in debt.

Since 2008, the company had dumped tens of billions on capital spending over and above cash flow, resulting in declining earnings and a piss-poor performance.

But that era came to an end with McClendon’s ouster in early 2013.

His replacement, Doug Lawler, had one mandate: Reduce debt fast.

Since Lawler’s takeover, he has commanded the clearance of billions in assets, most of which weren’t central to the company’s core operations.

But a sale in mid-October will likely be his crowning achievement when it comes to debt disposal. And you should be adding to or initiating a position in Chesapeake today.

Dropping All Debt

In the face of the biggest decline in oil prices since 2010, Chesapeake sold a huge chunk of its natural gas and oil acreage to Southwestern Energy (SWN) for more than $5.3 billion.

As part of this deal, Chesapeake will shed 413,000 acres with 1,500 wells in West Virginia and southwest Pennsylvania.

The deal also includes wells in the Marcellus and Utica shales that produced about 336 million cubic feet of gas per day last month.

The crazy thing is, this sale won’t affect the growth rate of the company’s remaining assets (which is expected to remain between 7% to 10% going forward).

It will, however, impact the company’s future earnings for the better.

Worth So Much More

To put the magnitude of Chesapeake’s current sale in perspective, at the time it was announced that Chesapeake’s market capitalization was about $12 billion.

The sale of this one asset represented almost half of its market cap. So the remaining company is now flush with capital.

Indeed, Chesapeake will have a measurable performance that isn’t clouded by interest expense and debt service for the first time in a decade.

To top it off, even after the sale, the company still owns massive assets in the major oil and gas producing regions of the United States.

Those assets are majorly undervalued, too . . .

Consider that energy companies Encana (ECA) and Devon (DVN) spent over $12 billion in the last two years on just two acquisitions. The fact that companies are buying up properties means they’re anticipating stronger energy markets ahead, despite the current decline.

Plus, while the price of oil and gas are critical for future profits, after this sale they’re less critical than they were just a few months ago.

Bottom line: Chesapeake has managed to almost completely deleverage its decade of debt in just the past two years. If this company could survive $2 per thousand cubic feet of natural gas and the biggest recession of our generation, the prospects of operating in a better environment could be nothing short of spectacular.

And “the chase” continues,

Karim Rahemtulla

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By Karim Rahemtulla