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Chesapeake Energy (NYSE:CHK), the second largest producer of natural gas in the U.S., had a dismal year. The stock came down from over $25, and remained between $14 and $22. The plight of the company was due to a number of factors, namely, record low natural gas prices, corporate governance issues and relentless capital spending on natural gas assets. Massive spending on natural gas assets made the company one of the biggest producers of natural gas; however, low natural gas prices turned this asset into a liability.

The company finished the year strongly, and a change in strategy along with some changes at the board level looks to have worked for Chesapeake. Going Forward, I believe there are positives for the company, and it looks like the company is experiencing a turn-around. We have seen a considerable rise in the stock price over the past three months. However, the turn-around for Chesapeake energy is by no means complete, and the company will have to carry on its positive approach.

Correcting the Mistakes

Chesapeake reported better than expected fourth-quarter results, which has given something to investors to be optimistic about. The results were enhanced by impressive performance of the oil segment. Chesapeake is shifting focus to liquids, and oil now figures significantly in the total production (out of 147,500 bbls, 97,100 bbls was oil and the rest was NGL). Oil and liquids will provide stability to revenue and decrease the exposure to the low price natural gas segment.

One of the biggest reasons for the poor state of the company was the relentless acquisition of natural gas assets. Aubrey McClendon could not resist the urge to sit on the biggest assets of natural gas. Of course there was his own interest also involved in these transactions. As a result, the company came under a heavy burden of debt. However, things are getting better for the company.

The company is selling underperforming and economically unviable assets. I believe this is a good strategy, which will be beneficial in the short-term as well as long-term. In the short-term, the asset sales will allow the company to reduce its debts and make-up for the funding gap, and in the long-term this will enhance the credit rating of the company. An improvement in the credit-rating will allow the company to have better access to funds in case of any need in the future, and it will also allow the company to have more financial flexibility.

Momentum will Continue

Chesapeake has been able to reduce its costs due to the extensive efforts of management. Furthermore, the company is focusing on liquid rich Utica Shale, which will further enhance the operating results over the next year. In addition, the company is currently focusing on drilling the best of its core assets in order to continue the momentum. Cost reduction and using the best of core assets will allow the company some stability. However, it should be kept in mind that the company will have to bring down its capital expenditures to control the funding gap.

Natural gas export plans will benefit major players in the gas sector in the long-term. There is huge potential for LNG exports. Export of LNG will allow the companies to bring the supply down in the domestic market. However, exports of LNG are not expected to have a big impact in the short-term, and natural gas prices are expected to remain low. A decrease in drilling activities can also help the companies with major natural gas resources. Bringing down the supply will support natural gas prices, in my opinion. In the long-term, I believe natural gas prices will recover. It is unlikely that the prices will go back to the record highs of 2008; however, there is a chance that we may see a considerable recovery over the next two to three years.

Conclusion

Chesapeake is a beaten down player at the moment. However, I do not believe the company will remain in its current position for long. I expect the company to perform well over the next twelve months due to the effective strategy implemented by the management. There might be some ups and downs on the way; however, I believe the company is on the right track. Chesapeake's turnaround is still far from being complete. However, the signs are encouraging and shareholders have reasons to be optimistic.

Source: Momentum Is With Chesapeake Energy