Chesapeake Energy: Too Much Hype?

Aug.14.13 | About: Chesapeake Energy (CHK)

Back in February we touted Chesapeake (NYSE:CHK) as a buy. Well, we're back to buy more. This comes despite the stock being up 25% since then.

Chesapeake primary focus is the acquisition (not so much anymore), exploration (still some), development and production (main focus going forward) of natural gas and oil in the U.S. The company holds interests in various natural gas resources, including the Haynesville and Bossier Shale in northwestern Louisiana and East Texas, the Marcellus Shale in the northern Appalachian Basin of West Virginia and Pennsylvania; the Barnett Shale in the Fort Worth Basin of north-central Texas, and the Pearsall Shale in South Texas.

The company also holds interests in various liquids-rich resource plays located in Oklahoma, the Texas Panhandle, West Texas, southern New Mexico and Wyoming.

  • Management: It made a great hire by bringing over a VP from Anadarko Petroleum. Doug Lawler has a strong history of managing the international LNG projects for APC. We think you can see where CHK is going with this hire, with one of the best nat gas portfolios in the US and a very strong oil portfolio that is getting better each quarter.
  • Debt And CapEx: CHK said it would sell $4B to $7B worth of assets in order to clear up its debt situation and it has recently hit the $3.6B mark, right on pace or maybe even a little ahead. It has good assets and the market seems to be good for selling and buying, so expect this to continue without issue. Drilling CapEx is expected to be between $6B and $6.5B in 2013, down over 15% year over year. This comes as drilling CapEx will be focused on existing assets, and overall CapEx is to be focused on drilling and completion. CHK plans to focus on the Eagle Ford shale and the Anadarko Basin. The company still has one of the best portfolios of unconventional assets in the U.S. Over the long-term the company will focus on developing the Eagle Ford, Granite Wash and Mississippi Lime plays.
  • Here is a summary of its most recent quarterly figures (all very impressive on a year over year basis):
  • Net income per share: $0.51 versus $0.06 prior year
    • EBITDA of $1.42B - 77% y-o-y increase
    • Oil production is 116,000 bbls per day - a 44% y-o-y increase
    • Increased projected annual production by 1 million bbls, which is a 25% increase y-o-y
    • Total daily production is up 7% y-o-y to 4.1 Bcfe

What to do

I'll start by reiterating our February thesis...

"Chesapeake appears to be a buy. The natural gas market is stable with a bullish outlook (still 75-80% of its production), its transition to liquids has been quick and effective (currently over 50% of realized revenue), the new leadership (Board + new CEO) will be able to realize the value of its tremendous asset base."

As an addition to the new positions taken in Chesapeake by billionaire Carl Icahn and Mason Hawkins' Southeastern Asset Management during 4Q 2012 (collectively owning nearly 140MM shares), Bruce Berkowitz of Fairholme and Blue Mountain Capital joined the fight with new positions during 1Q 2013 (with the two owning over 30MM shares).

We believe that CHK is still a buy. Most analysts still have the company with a price target in the upper 20s, so at $25 there isn't much room for growth, but we expect CHK to break through those estimates in the next year or so as oil growth continues, gas prices stabilize and potentially increase, and as it rearranges its portfolio to rid its debt burdens.

Disclosure: I am long CHK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.