Chesapeake Energy (NYSE:CHK) has had quite an eventful year so far. Over the last six months, the company has been accelerating asset sales to close its funding shortfall and also continues to make progress in bolstering its profitability by cutting costs, and focusing on more lucrative oil and natural gas liquids production. Things have been looking brighter on the corporate governance front as well after the firm’s embattled co-founder Aubrey McClendon resigned from his post of CEO in April. (See: What Lies Ahead For Chesapeake As McClendon Exits) In May, the company hired Robert Douglas Lawler, a senior executive from Anadarko (NYSE:APC), to take over as CEO. The move should help to improve Chesapeake’s image with investors who were becoming increasingly concerned about the firm’s high risk levels, mounting debt and free-spending ways. Here is a quick look at some of the factors that we believe are currently driving the firm’s stock.
Capex Funding Shortfall Closed, Price Realizations A Concern
Chesapeake’s capital expenditures have exceeded cash flows for almost every year over the past decade as it invested heavily in expanding its acreage and drilling program, running up a total debt load of around $13 billion (as of Q1 2013). This has prompted the company to divest assets to pare down debt and meet spending needs. The company intends to sell as much as $7 billion worth of assets this year and has already divested (or entered into agreements to sell) around $3.6 billion in assets so far. This effectively allows the company to meet its capital expenditures for 2013, without taking on any additional debt.
However, realizing fair prices on asset sales has proven an issue. For instance, in February the company sold a 50% stake in some of its acreage in the Mississippi Lime formation to China’s Sinopec at prices that were around 60% lower that what it had valued them at previously. Earlier this month, the firm sold some acreage in the Eagle Ford and Haynesville shale formations to Exco Resources Inc. for around $1 billion – a price which was again lower than expected. We believe that Chesapeake’s ability to carry out asset sales at fair prices is likely to be the key catalyst for its stock price in the near term .
Chesapeake Is Now Predominantly An Oil Company
While natural gas prices in the U.S. are dependent on primarily North American demand, oil prices are largely linked to international prices and are relatively more stable. Given the volatility in gas prices in the U.S. of late, Chesapeake has been boosting its oil and natural gas liquids (NGL) production, and we believe that the company’s progress has been commendable so far. Over the last two years, Chesapeake has been the most successful oil explorer in the United States, adding over 700 million barrels of oil to its reserves outpacing larger rivals such as Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM). In Q1 2013, the company’s oil production grew by around 54% year-over-year while NGL production grew by 14%. Production is expected to increase further as the firm expects to allocate more than 80% of its drilling budget for 2013 towards liquids. As of last year, the company’s revenues from oil and NGL production were nearly double the revenues from natural gas.
Natural Gas Division Could Get A Boost Over The Long Run
Coal-fired power plants are one of the largest emitters of carbon dioxide (CO2) in the United States. Now, President Barack Obama’s new climate action plan to tackle global warming intends to put in place measures to regulate greenhouse gas emissions from both new as well as existing power plants. Complying with these standards will require coal-fired power plants to install expensive carbon capture technologies which would drive up generation costs. (See Also: Is Clean Coal Viable For Utility Companies In The Long Run) Since CO2 emissions for natural gas-fired power plants are about half that of coal, it might be easier and more cost effective for them to meet the standards. Additionally, the upfront investment for a gas-fired plant is much lower – while a new coal-fired power plant can cost as much as $3,200 per kilowatt, a modern natural gas-fired power plant costs about $1,000 per kilowatt. This could potentially boost demand for natural gas from electric utilities in the United States over the long term.