By: Ahmed Ishtiaq
Chesapeake Energy (CHK), the second largest natural gas producer in the country, has been through a tough year. The stock has lost almost 23% of its value during the year, largely due to concerns about the debt of the company. The company is trying to raise cash by selling assets to pay off some of the outstanding debt. Chesapeake also faced a liquidity crunch, and had to borrow at extremely unfavorable rates. In addition, increased exposure to natural gas heavily affected the company.
However, Chesapeake has changed its focus recently and currently it is working on reducing its exposure to natural gas. In order to achieve its goal, the company decided to sell almost $14 billion of assets during 2012. Chesapeake's stock is currently beaten down badly by bears, which I believe presents a great opportunity to long-term investors. The company recently announced an agreement to sell its midstream assets for $2.16 billion.
Midstream Asset Sale
Chesapeake stock suffered badly after management announced in its most recent earnings announcement that the asset sale could be delayed. It was expected that the company will complete the sale of its assets during the first quarter of 2013. However, management has finalized the deal before the end of December. The company has entered into an agreement to sell a considerable portion of its midstream assets to Access Midstream Partners, L.P. (ACMP) for about $2.16 billion. These assets are primarily located in the company's Marcellus, Utica, Eagle Ford, Haynesville and Niobrara shale plays. The transaction with Access is expected to close by the end of 2012.
Furthermore, the company has completed the sale of its midstream assets in Texas and Oklahoma during the current quarter. The company also expects to complete the sale of its remaining midstream assets by the end of the first quarter of 2013 for approximately $425 million. As a result, the total of current and anticipated midstream asset sales will go up to $2.75 billion. Including the approximate $2.125 billion of midstream asset sales completed in the second and third quarters. The proceeds from the company's midstream exit are anticipated to total approximately $4.875 billion.
Affect of Asset Sale
As I mentioned above, a hitch in the asset sale was a big reason for the fall in share price of the company. Investors were pessimistic about the ability of management to sell assets and decrease the debt levels. However, management has done a brilliant job of selling the assets before 2013. This deal is extremely important for management as it will help the company achieve its target debt level. As a result of this deal, the net debt level of the company will come down to $9.5 billion. This deal alone does not solve all the problems for the company; nevertheless, it is a step in the right direction.
I believe Chesapeake is trading at a deep discount at the moment. I have explained in my previous articles how major investors and fund managers are bullish about the company. I remain confident that the stock will be a good investment in the long-term. Slowly, the balance sheet of the company is improving, and 2013 will bring further good news.
Comparison with Peers
Debt to Equity
The comparison shows that the stock is trading at a premium compared to Devon and Exxon Mobil based on forward P/E. However, the stock beats all of its competitors on P/B and P/S ratios. In addition, the company has the highest EPS growth rate among its peers. However, margins and the debt to equity ratio for Chesapeake do not paint a pretty picture. There is no denying that the company needs further measures to improve its balance sheet. However, management is taking steps in the right direction and tackling the issues well.
Chesapeake Energy is not a short-term play, and it has certain risks. However, the long-term risk reward profile of the company looks good. Management will take some time to get the company out of its current situation. Moreover, we should also remember that the company still owns the biggest acreage in the country. If the natural gas market makes a recovery, the company will have the option to drill for natural gas. Chesapeake is also turning its focus to liquids, which will provide stability to its revenues. There are a lot of positives for the company along with some negatives. However, I believe the positives will outweigh the negatives in the long run, and CHK will return handsomely to its investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.