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Chesapeake Energy (NYSE:CHK) looks to be an interesting play as the price of nat gas is expected to increase moving forward. Over the past number of years the company has had some financial setbacks. New CEO Douglas Lawlor has many areas of the company to "clean up". One key aspect that is reducing shareholder value is the net debt.

Since 2009 the company's net debt has remained relatively the same.

  • 2009 - $11.988 billion
  • 2010 - $12.538 billion
  • 2011 - $10.275 billion
  • 2012 - $12.333 billion
  • 2013 TTM - $11.749 billion

As the company's net debt has remained relatively flat over the past five years, this has had a negative effect on the company's shareholder value.

In the post below using the discounted cash flow method, I will calculate the value of the company with the debt and without the debt to show the significance of the company's debt and how it is gutting shareholder value.

Including the Net Debt

As you can see in the chart below Chesapeake Energy has a NPV or enterprise value of 19.339 billion. This valuation is based off the industry average terminal value of 12.95x EBITDA. As the net debt is currently $11.749 billion this leaves only $7.590 billion in equity value which is how one calculates the shareholder value using this method. Based on this result, it is easy to see if the company wants to increase shareholder value they must reduce the net debt.

FY 2011FY 20122013 TTM
Operating Income2,921-1,6942,576
Taxes1,123-380813
Unlevered Net income1,798-1,3141,763
D&A1,9232,8112,901
EBITDA4,8441,1175,477
Free Cash Flow-8,547-11,905-3,988
WACC7.28%
Terminal Value 12.95X EBITDA 70,927
Total Cash Flow-8,547-11,90546,487
Net Present Value$19,339.93
Total Debt12,736
Cash and Cash Equivalents987
Net Debt11,749
Equity Value$7,590.93
Shares Outstanding665.1
Current Value$11.41

Excluding Net Debt

In the chart below, I will subtract the net debt and give it a value of $0. This will give the value of the company discounting the debt.

FY 2011FY 20122013 TTM
Operating Income2,921-1,6942,576
Taxes1,123-380813
Unlevered Net income1,798-1,3141,763
D&A1,9232,8112,901
EBITDA4,8441,1175,477
Free Cash Flow-8,547-11,905-3,988
WACC7.28%
Terminal Value 12.95X EBITDA 70,927
Total Cash Flow-8,547-11,90546,487
Net Present Value$19,339.93
Total Debt12,736
Cash and Cash Equivalents987
Net Debt0
Equity Value$19,339.93
Shares Outstanding665.1
Current Value$29.08

Moving forward as the price of nat gas increases this should provide management with the opportunity to improve company fundamentals. With the expected increase in earnings and cash flow, I believe it is imperative to the shareholder that management significantly reduces the net debt of the company.

Conclusion

As market conditions improve for companies focused on natural gas this should provide an opportunity for management to focus on "cleaning up" the company's fundamentals. I believe Mr. Lawlor and his team need to focus on reducing the debt to help increase shareholder value. The reduction of debt will increase shareholder value and reduce the risk to the company. Currently, I have Chesapeake as a hold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.