Is Chesapeake Energy A Buy Going Into Earnings?

| About: Chesapeake Energy (CHK)


Chesapeake reported solid results the last time, with terrific revenue growth and massive bottom line improvements.

Chesapeake's cost-cutting should help the company report yet another strong earnings improvement in the first quarter.

Disposal of assets has played a key role in Chesapeake's resurgence, and this is expected to continue going forward.

Analysts expect Chesapeake's earnings to grow at a terrific rate, so it can be a good long-term buy.

America's second-largest natural gas producer, Chesapeake Energy (NYSE:CHK), has been in resurgent mode in the last month. Chesapeake's shares have gained 7% since April, and the company will be looking to keep this momentum intact when it reports its first-quarter results on May 7. But will Chesapeake be able to continue its newly-found momentum, or will its performance take a beating? Let's find out.

Analysts' expectations

Analysts expect Chesapeake to report revenue of $4.45 billion in the first quarter. This would be a massive rise of 30% year-over-year. Earnings, meanwhile, are expected to rise to $0.48 per share from $0.30 a share in the year-ago period. So the expectations from Chesapeake are quite bright, and it won't be surprising if the company manages to beat the earnings estimates since it is aggressively cutting costs and improving the efficiency of its business.

In fact, in the fourth quarter, Chesapeake had reported tremendous results. The company's revenue rose 28% year-over-year to $4.54 billion, while it reported Q4 profit of $161 million, or $0.27 per share, excluding one-time expenses. This was better than the year-ago net profit figure of $146 million, or $0.26 per share. So, Chesapeake is on a good run, and the company is adopting several strategies to ensure that it keeps the momentum intact.

The momentum should continue

Chesapeake is coming into fiscal 2014 with strong momentum. It had an exceptional year in 2013, with total production growth of 11%, adjusted for asset sales, adjusted oil production growth of 71%, adjusted EBITDA growth of 34%, and adjusted EPS growth of 146%.

Chesapeake had dramatically improved its capital efficiency, cash cost, and operating margins in 2013. It also made progress in strengthening its balance sheet. In 2014, Chesapeake's investment program is expected to yield improved returns and increase its high-quality core acreage through further capital efficiencies, downspacing, and improved recovery on a per well basis.

Despite some severe weather challenges, Chesapeake finished 2013 on a strong note, with Q4 production at approximately 665,000 barrels of oil equivalent per day, above the expected midpoint of its 2013 guidance range.

Moreover, Chesapeake has made investments to restructure its business in order to optimize its competitive capabilities and build a solid financial foundation. This should enable the company to be successful through the commodity price cycle.

The company is on a spree to dispose its assets. The sale of its interest in Chaparral Energy, coupled with expected proceeds from previously closed asset sales and other anticipated non-E&P asset sales total around $1 billion. In addition, Chesapeake has planned other tactical and strategic asset dispositions designed to further strengthen its business and reduce balance sheet leverage and complexity.

For 2014, Chesapeake's investment program is focused on projects with a higher rate of return. Drilling and completion cost reductions, coupled with cycle time improvements are driving improved returns in its Eagle Ford and Mid-Continent oil plays.

Chesapeake is also seeing the early benefits of cost reductions and efficiency gains in its high-quality gas portfolio. As an example, it has recognized significant cost savings from pad drilling in Haynesville. Its limited investment program in Haynesville is expected to yield a 100% rate of return when the minimum volume commitments are considered. Also, additional cost efficiencies of 20% to 25% are expected, resulting in competitive returns.

Last year, Chesapeake worked on several areas of its balance sheet and capital structure with the goal of eliminating higher-cost obligations, along with those obligations that add to the financial complexity of the company or hinder its ability to achieve strategic asset dispositions. Of particular note was the rise in its unrestricted cash balance, which increased to $837 million. Along with Chesapeake's undrawn $4 million corporate banking facility and $100 million of availability on its COS credit facility, the company had a strong liquidity position.

Additionally, Chesapeake eliminated more than $200 million in off-balance sheet commitments through the repurchase of certain drilling rigs and compressors, subject to sale and leaseback transactions. This move helped Chesapeake reduce leverage, and is expected to facilitate the recently announced sale or spin-off of its oilfield services business. Further, the company has completed the repurchase of another $135 million worth of rigs and compressors.

Valuation and takeaway

Chesapeake is growing at a solid rate, and it looks like the company will be able to continue this momentum with its upcoming results. Chesapeake has a good cash position, and the deposition of its assets means that the company will be able to service and pay back its debt in the due course of time. In addition, Chesapeake's trailing and forward P/Es show that the company's earnings are expected to increase at a terrific pace.

Chesapeake trades at 39 times trailing earnings, and its forward P/E multiple comes in at 12. So, analysts expect the company's bottom line to continue improving. Also, the long-term forecast is quite positive. For the next five years, Chesapeake's earnings are expected to grow at a CAGR of 35%, making it a good long-term investment. So, investors should definitely consider an investment in Chesapeake Energy, as it is well-positioned to scale greater heights in the future.

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.