U.S. Markets open in 8 hrs 6 mins

Chesapeake Energy Is Making Progress

Richard Saintvilus

NEW YORK ( TheStreet) -- Investors are once again warming up to Chesapeake Energy . It continues the trend of what has been an on-again/off-again relationship.

After beginning the year at $16.46 per share, Chesapeake has now posted gains of more than 20% to its current level of around $20.15. That's the good news. Unfortunately, since reaching a high of $22.97 on March 15, the stock has been down 13%, at one point as low at 21%. Frustrated investors began to wonder if the stock peaked.

Given the state of the natural gas industry, still marred by weak prices and limited reserves, the fact the stock is up at all is a meaningful accomplishment in its own right.

Besides, it's not as if Chesapeake has been "lighting it up" in recent earnings. Although the company has made great strides after some regrettable decisions by its former CEO, Chesapeake's future remains highly leveraged to a better-performing natural gas industry. To that end, the first-quarter report was encouraging.

Chesapeake reported daily production of natural gas equivalents for the first quarter average roughly four billion cubic feet, which represents a 9% increase year over year and 1% better than the fourth quarter. Management said the production levels included three billion cubic feet per day of natural gas and almost 160 thousand barrels of liquids per day.

With such strong numbers, it came as no surprise to see solid growth in the production of oil and natural gas liquids (NGL). Average daily oil production grew 6% sequentially and a stout 56% year over year, while NGL production advanced 8% sequentially and 14% year over year. Management said the production increases were driven primarily by strong contributions from the Eagle Ford Shale and Greater Anadarko Basin plays.

However, the numbers were not as robust across the board. Natural gas was a notable underperformer. Even though Chesapeake only posted a 2% year-over-year increase in natural gas production, which arrived flat sequentially, I'm willing to give the company a pass here. In my view, it was encouraging that there was solid growth in the northern Marcellus Shale play, which offset weakness in the Haynesville Shale play.

On the profits side, Chesapeake was hot. Net income was $15 million, or 2 cents per share. This compares favorably to last year's net loss of $71 million, or 11 cents per share. When excluding some one-time items, profits soared impressively to 30 cents per share, burning estimates by 5 cents.

It's hard not to be impressed by these numbers given the embarrassment this company suffered through thanks to its former CEO, Aubrey McClendon, whose tenure ended abruptly for legal reasons. It's worth noting here that it was McClendon's vision of the shale basins and their growth potential that is still paying off handsomely for Chesapeake today.

Nevertheless, there's a new sheriff in town -- albeit on an interim basis. Steven Dixon is now serving as acting CEO until a permanent replacement is found. Given how well Chesapeake performed this quarter, Dixon deserves plenty of credit, especially from the standpoint of profitability, helped (in part) by aggressive expense controls this quarter where costs fell almost 20% year over year.

Here's something else to consider: The fact that the company uses techniques like drilling multiple wells from a single drilling pad to increase efficiency demonstrates the commitment Chesapeake now has towards profitability. But I wonder how long the company can look at efficiency strategies such as this while also maintaining a healthy balance of increasing output.

To say it more plainly -- although I appreciate the company has heavy debt burdens to the extent of more than $13 billion in long term maturities, production growth can only come from spending. Perhaps this is what the Street has realized given the 16% decline that the stock has suffered since peaking at just under $23 per share.

Bottom Line

If there are any legitimate concerns about Chesapeake today, it centers more on the health of the overall sector and not so much about the company's performance. Chesapeake is in a business that presents a critical need and, eventually, the costs of natural gas and shale demand will normalize.

In the meantime, there will be short-term volatility in the stock. Still, at today's prices, Chesapeake seems fairly valued.

At the time of publication, the author held no position in any of the stocks mentioned.

EXCLUSIVE OFFER: See inside Jim Cramer’s multi-million dollar charitable trust portfolio to see the stocks he thinks could be potentially HUGE winners. Click here to see his holdings for FREE.