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Summary

  • Chesapeake is in great hands and is well on it way to becoming a top-performing E&P company.
  • With continued improvement in operations and a strengthening balance sheet, fair value to reach $32 by the end of the year.
  • As impressive has been these improvement, the company's future is still highly leveraged to a better-performing natural gas industry.

Whenever there is a discussion about the best natural gas producers on the market, it is very rare that you hear the name Chesapeake Energy (NYSE:CHK) get mentioned ahead of rivals like Apache (NYSE:APA) and Anadarko (NYSE:APC). And this is even though Chesapeake, whose stock has soared more than 46% in the trailing twelve months, have broadly outperformed the entire energy sector.

Given the stock's strong gains, I won't go as far as saying the company is disrespected, but there is the sense that Chesapeake is still being perceived as the dysfunctional operation that we heard about under the leadership of former CEO Aubrey McClendon. Although the Street still has an insatiable appetite for growth, it seems analysts also appreciate strong corporate governance, which had become a question over the past couple of years.

Today, Chesapeake, under the direction of new CEO Doug Lawler, resembles a more mature company. Chesapeake no longer brags about the size of its checkbook, while trying to outbid rivals for natural gas. Even more impressive has been the manner in which Chesapeake has executed its asset sales to bring the company some much-needed liquidity. The Street has responded favorably to these changes.

But for the stock to continue its accent management has to convince investors that despite the recent changes the company has not forgotten how to grow. With both Apache and Anadarko making investments for the future, Chesapeake can't afford being left behind. And when the company reports first-quarter results Wednesday, the numbers and guidance has to demonstrate the sort of confidence that investors, by virtue of the 46% gain in the stock, have come to expect.

The good news is that analysts also expect better results given that estimates have risen over the past three months. The Street will be looking for earnings per share of 48 cents, which is a 60% jump year over year. In the year-ago quarter, Chesapeake earned 30 cents. This is an extraordinary earnings jump in just one year, thus why the stock has performed so well.

This sort of profitability demonstrates how Chesapeake can still produce strong returns. Management has worked diligently in areas like capital allocation and divestments. In the process, the company has dramatically improved its capital efficiency, cash cost and operating margins - all of which served to strengthen Chesapeake's balance sheet. The results has been a leaner and cleaner business to understand.

In terms of revenue, the Street will be looking for $4.45 billion, which will represent 30% year-over-year growth. Revenue has never been a problem for this company. But revenue is not what drives this sector. It's all about production growth. In that regard, very few companies are able to match what Chesapeake has been able to achieve, including averaging roughly 669,600 barrels of oil equivalent (BOE) per day. This was an increase of more than 3% year over year.

By comparison, Anadarko and Apache reported weak production due to weather-related effects. For Chesapeake, that it was able to post a 32% year-over-year increase in average daily oil production was nothing short of impressive. And when you combine this with its 19% year over year increase in natural gas, you have all of the making of a energy powerhouse - one that is only getting better as new management continues with its restructuring.

All of that said, while the company's goals are well ahead of schedule, Chesapeake is not without some risk. As impressive has been these improvement, the company's future is still highly leveraged to a better-performing natural gas industry. And this is what management must convey on Wednesday, while at the same time assuring investors that they can overcome these headwinds.

All told, there is still plenty of work left to be done. But I've seen enough from this management team to be convinced that Chesapeake is in great hands and is well on its way to becoming a top-performing E&P company. With the stock trading at around $28 and a P/E of 38, I won't rush to say these shares are cheap. But with continued improvement in operations and a strengthening balance sheet, fair value to reach $32 by the end of the year.

Source: Why Chesapeake Energy Is Heading To $32