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A lot has been going on behind the scenes at Chesapeake (CHK). After replacing Aubrey McClendon, the board has added another member to the board of directors - Thomas L. Ryan has been elected to fill the seat vacated by Louis A. Simpson, and has been appointed to the audit committee. Since the issues with the corporate governance came out, the company has made considerable changes to the management as well as board. As a result, corporate governance of the company is in much better condition compared to a year ago, in my opinion.

On the business front, Chesapeake has been able to successfully shed some of the non-core assets and direct the funds towards the debt management and investment in high-growth segments.

Expectations for the coming quarters

The recent earnings announcement had some encouraging facts for investors. Chesapeake announced 9% increase in production mainly attributed to the Ohio Shale Project and its strategic investment decisions. Oil production as a % of total production too showed year-over-year increase of 5% in the last quarter. The focus is to rely on operational efficiencies rather than expansion of its operations. Capital expenditure is expected to be in line with the budget. However, the amount of expenditure allocated to drilling has been increased from 50% to 80%. Production expenses for the current quarter declined by 18% and is to follow a similar trend in the near future. Net income amounted to $15 million or 30 cents per share which were above investors' expectations.

For the future, I believe there are a lot of positives for the company. Natural gas prices are rebounding, and a considerable recovery is expected over the next year. Chesapeake has been trying to add more liquids to the portfolio, but its natural gas segment still remains strong. Internally, the company has made changes, which will be beneficial for it in the long-term. The focus is on three things: increasing liquids production, achieve capital efficiencies and enhancing the financial flexibility of the company. Success in achieving these three will be vital for the long-term health of the company. At the moment, I believe the company is on track to achieve its goal.

Debt still lingers

Despite reporting profits in the recent quarter, the company's balance sheet position still remains weak. Long-term debt still remains one of the biggest problems faced by the energy giant. Low commodity prices further add to the funding gap experienced by the company. Steve Dixon, the interim CEO, has taken a more conservative approach to the situation by lowering down production and administrative costs. However, the company is also taking advantage of the low interest rate environment and replacing high-yielding debt with lower yielding notes. In addition, debt payments have been financed by proceeds from sale of small assets. The latter approach has proven to be more effective as it provides the company more flexibility in its operations.

The management has reconstituted its debt portfolio by selling senior notes worth $2.3 billion whilst replacing the previous high interest debt. There was further good news for the company as it was able to win against Bank of New York Mellon (BK); the bank tried to prevent the company from redeeming the 6.775% notes. The company will be able to save $100 million in interest expense due to the transaction. Chesapeake redeemed the debt at par value and refinanced the debt with the above mentioned $2.3 billion, which was issued at collectively lower coupon rate than the previous issues.

Conclusion

As I mentioned above, the internal as well as external environment is favorable for Chesapeake, which will allow the company to overcome its remaining issues. Chesapeake has stepped up its recovery stage, which I believe will be followed by a growth stage as the natural gas prices recover and liquids production increases. However, the most important element for Chesapeake has been patience; those investors who have been patient during the crisis are expected to be rewarded now.

Over the past six months, the stock has gained about 11% -- there have been ups and downs but the overall trend has been upward. At the moment, Chesapeake is attractively priced and I expect the stock to continue its upward movement.

Source: Chesapeake Will Continue Its Rise