Chesapeake Energy (NYSE:CHK), America’s second largest natural gas producer, has chosen its long time Chief Operating Officer, Steve Dixon, to serve as its interim CEO while the firm continues its search for a permanent replacement to former CEO, Aubrey McClendon, who left at the end of March. While we do not expect to see any significant changes in the firm’s strategy under the acting CEO, he has underscored that the firm will stick to its budgets and focus on divesting assets to get back on track. (See Also: What Lies Ahead For Chesapeake As McClendon Exits)
Focus On Financial Discipline
Chesapeake’s capital expenditures have eclipsed its cash flows for almost every year over the past decade as the firm invested heavily in expanding its acreage and drilling capex, running up a total debt load of around $12 billion. The firm’s cash flows are projected to be around $4 billion short of its expected spending for this year as well and realizing asset sales to meet the shortfall and pay off debt is going to be crucial.  In a conference call conducted on April 1, the acting CEO highlighted that the company would not exceed this year’s drilling budget of $6 billion and would also be divesting as much as $7 billion in assets through the year. The firm has already sold around $1.5 billion in assets year-to-date.
The firm also indicated that there had been good interest for some of the smaller parcels of assets that it has been marketing. We think that it’s quite likely that Chesapeake will have better bargaining power with potential buyers for these assets unlike large assets such as those in the Mississippi Lime shale formation that the firm sold to Sinopec in February at deeply discounted rates. (See Also: After Chesapeake Gives Sinopec A Sweetheart Deal Are More To Come?)
Rising Gas Prices Could Help Q1 Results
Natural gas prices have increased by almost 20% over the last three months, touching levels of around $4 per million British thermal units (MBtu) for the first time in nearly 18 months. While Chesapeake has hedged around half of its estimated gas production for the year at around $3.6 per mcf, it should be able to realize higher prices on the remaining portion of its natural gas production. (See Also: Drilling Into Chesapeake’s Natural Gas Hedging Program) The price rise is largely due to the strong demand brought about by a prolonged winter, and we could see some reversal in prices during the summer. However, we believe that it will have a positive impact on the firm’s Q1 results.
We have a $21 price estimate for Chesapeake, which is in line with the current market price.