Chesapeake Worth $28 As Shift To Liquids Mitigates Natural Gas Prices

by Trefis Team
+46.08%
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Chesapeake
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Chesapeake Energy (NYSE:CHK) had a rough first quarter of 2012; while depressed natural gas prices are compelling the company to strategically shift to a more balanced offerings of gas and liquids, we expect that asset sales should boost cash flows for the rest of 2012. Chesapeake is a specialized company with an expertise in unconventional drilling, and it competes with other oil and natural gas companies like Linn Energy (NASDAQ:LINE) and Cimarex Energy (NYSE:XEC).

See our complete analysis for Chesapeake

Move to Liquids

Sustained low natural gas prices have forced Chesapeake to look for alternative revenue streams. The company is focused on maintaining a balance of liquids and gas plays because of volatility in prices. As a result, the company’s first quarter saw its attempt to popularize natural gas use in collaboration with partners General Electric (NYSE:GE) and 3M (NYSE:MMM) while simultaneously reducing its exposure to gas. Chesapeake has closed several natural gas operating wells over the last few months, and is likely to continue doing so in the near term. At the same time the company is developing liquids-rich assets in order to diversify its exposure. The chart below shows how natural gas realizations can impact the company’s valuation.

Asset Sales

Chesapeake holds some valuable oil and natural gas assets, owing to its expertise in unconventional drilling, many of which it has been trying to monetize through sales. The company recently sold three assets for $2.6 billion, filed for an IPO for its affiliate Chesapeake Oilfield Services [1] and is also looking to divest more assets to Indian oil company OIL. [2] The asset sales are being done in order to meet planned capital expenditures and to reduce the company’s significant debt burden.

New Price Estimate Reflects Prices, Volumes, Capex

Our price estimate for the company has been revised to $28, which reflects the company’s strategy of shifting to more liquids-rich plays, reflecting greater crude oil volumes. Crude oil price forecasts have been revised upward to reflect the present oil trading trends, and is also reflected in our forecasts for higher margins over the next few years. The company’s ambitious capital expenditure plans have also been incorporated. One interesting development from these updates is that natural gas is no longer the primary driver of the company’s value. That Oil production now contributes nearly 60% of the company’s value, according to Trefis estimates.

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Notes:
  1. Chesapeake Energy Corporation Announces Its Service Industry Affiliate Chesapeake Oilfield Services Files IPO Registration Statement, Company Press Release, April 2012 []
  2. Troubled Chesapeake Energy’s financial savior – India?, Oilprice.com, April 2012 []
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