We reaffirmed our Neutral recommendation on Chesapeake Energy Corporation (CHK) on Dec 30, 2013. The company’s focus on the liquid-rich plays like Utica Shale is expected to contribute highly to its growth momentum going forward. However, a weak financial profile with huge debt balance remains a major concern.
Chesapeake – an independent oil and gas company – registered higher production on lower operating costs from its underlying assets during the third quarter.
Chesapeake plans to invest heavily in the development of its liquids-rich holdings in the Eagle Ford Shale, Granite Wash and Mississippi Lime. Most importantly, the company’s efforts seem to produce desirable results, reflected by an almost 22% year-over-year increase in oil production during the third quarter.
As the company shifts its focus to more liquid-rich plays, it expects natural gas production to fall in 2013, while liquids production is expected to increase approximately 28–34% year over year.
Chesapeake expects 2013 total production in the band of 1,440–1,468 Bcfe. Natural gas is expected to contribute 1,080–1,090 Bcf to the total production. Oil production forecast has been increased to 40–42 million barrels/MMBbls from 38–40 MMBbls projected previously, and NGL will likely be in the 20–21 MMBbls range.
Chesapeake is on track with its plan of reducing its long-term debt through monetizing its assets and cutting lease-hold spending. This monetization initiative is mainly aimed at coping with the mounting debt level as well as to fill the funding gap for its 2014 expenditures that resulted from the volatile natural gas prices.
However, Chesapeake’s results are particularly vulnerable to fluctuations in the natural gas market, since natural gas accounted for about three-fourth of Chesapeake’s first nine months of 2013 production.
Other Stocks to Consider
Currently, Chesapeake has a Zacks Rank #3 (Hold). Stocks in the sector that are currently performing well include Enbridge Energy Management LLC (EEQ), Harvest Natural Resources Inc. (HNR) and Clayton Williams Energy, Inc. (CWEI), each with a Zacks Rank #1 (Strong Buy).