On Tuesday, September 10, 2013 Chesapeake Energy's (NYSE:CHK) CEO Doug Lawler announced a number of significant organizational changes that may, in my opinion, be a much needed step in the right direction.
Mr. Lawler noted that, "Chesapeake is transitioning key leadership positions and making adjustments to its organization to properly align resources, reduce expenses, and improve its operating and competitive performance. The company's focus remains on financial discipline and profitable and efficient growth from captured resources. We look forward to realizing Chesapeake's full potential for our shareholders and employees".
In the wake of Mr. Lawler's comments I wanted to take a closer look at how cost-cutting improvements and the reinforcement of fiscal discipline could play a vital role in the company's long-term performance.
Recent Performance & Trend Status
On Tuesday shares of CHK, which currently possess a market cap of $17.20 billion, a forward P/E ratio of 12.53 and a beta of 1.42 settled at a price of $26.34/share. Based on their closing price of $26.34/share, shares of CHK are trading 2.63% above their 20-day simple moving average, 10.70% above their 50-day simple moving average, and 28.99% above their 200-day simple moving average. These numbers indicate a short-term, mid-term, and a sustainable long-term uptrend for the stock, which generally translates into an aggressive buying mode for most traders. From a cash and debt perspective, Chesapeake has a total of $677 million in cash and $13.29 billion in debt on its books as of June 30, 2013.
Recent Cost-Cutting Efforts, That Still Need Some Improvement
I remember the time in middle school when my teacher introduced two new additions to her letter grading system, and although it certainly wasn't any letter between the letters A-through-F, the letters S and U became an integral part of my middle school education.
As most of you already know the "S" represented a satisfactory performance and the "U" represented an unsatisfactory performance, and in the case of Chesapeake's first half cost-cutting efforts, I give the company's management a proverbial S. Why? Well, even though improvements were demonstrated, an increase in costs associated with the company's oilfield services segment still increased and therefore more needs to be done in order to reduce such costs by the first half of 2014.
According to Chesapeake's August 6th 10-Q, (for the period ending June 30th), the company demonstrated a clear understanding of how crucial and subsequently effective cost-cutting initiatives can be. For example, Chesapeake's H1 2013 results demonstrated a 13% reduction in the expenses that were directly related to its Natural Gas, Oil and NGL operations, a 25.77% reduction in general and administrative-based expenses and a 61% increase in oilfield service expenses when compared to the same period last year. If the company can continue to demonstrate a strong sense of financial discipline, especially when it comes to its cost cutting efforts, I see no reason why these particular costs can't see an additional reduction of 6%-8% by the first half of 2014.
Although concerning, the company's 61% year-over-year increase in oilfield service expenses should be considerably reduced by the first half of 2014 if not 2015 since the company intends on selling a number of its natural gas and oil properties over the next 12-18 months. If the company can successfully complete the sale of a large majority of its current "for sale" properties, I see no reason why those associated costs can't do an about face and begin to demonstration a year-over-year reduction.
A New-Found Fiscal Discipline
When Doug Lawler took over the Chief Executive role following Aubrey McClendon's departure earlier this year, one thing was certain, there was a new sheriff and every last detail was about to be scrutinized, and in the interim Mr. Lawler has been extremely quiet on exactly how management is coordinating such efforts. Simply put, the general aim is to "reduce the complexity and provide better clarity on where we are getting our best returns," Lawler told analysts on the company's second-quarter conference call. Based on Mr. Lawler's comments, I strongly believe that transparency is going to play a key role over the next 12-18 months, and if the company can continue to cut away a majority of its underperforming assets, an enhanced sense of fiscal discipline will be felt by the company's shareholders.
Fiscal discipline doesn't just end at the notion of improving performance while cutting away the dead weight, it actually goes beyond that. For example, the company's second quarter earnings of $0.66/share which were led by a 44% increase in oil production from its properties in the Eagle Ford Shale raises an interesting question. How can Chesapeake continue to increase oil production to an estimated 130,000 barrels per day, while reducing costs and improving efficiency? While Mr. McClendon would have been pleased with the 44% increase in production, I strongly believe that Mr. Lawler's perspective is much more complex and something to the tune of, "If production was raised 44%, why can't we raise it 50% and establish a strategy where costs and manpower are reduced while efficiency is at the forefront of this particular project".
When it comes to those who may be looking to establish a position in Chesapeake Energy, I'd continue to keep a watchful eye on a number of additional catalysts. In this instance, I'd keep a closer eye on the company's cost-cutting efforts over the next 12-18 months, as well the any indication that the company's fiscal discipline has improved in both the short and long term.