Chesapeake Energy: Dividend Yield, Debt Reduction, Asset Sales Make It Best Natural Gas Stock

| About: Chesapeake Energy (CHK)

Chesapeake Energy Corp (NYSE:CHK) Chief Executive Officer Aubrey McClendon made a presentation at the Barclays Energy Conference 2012 last week, in which he expressed his optimism regarding the sales of assets targeted for 2012, and revealed that proceeds from the sales will be directed towards debt reduction and the company's funding gap.

Company Overview

Chesapeake Energy Corp is an independent energy company involved in the exploration and production of natural gas and oil in the United States. It is the second largest gas producer in the U.S. with a market cap of $13.56 billion, and is headquartered in Oklahoma City, Oklahoma.

Asset Sales

As discussed in our report "Analyzing Chesapeake's Asset Sales," the company raised its target for the sales of assets from $11.5 billion-$14 billion to $13 billion-$14 billion in its earnings announcement for the first half of 2012.

During the presentation, McClendon was optimistic that CHK would be able to divest assets worth up to $14 billion for 2012, and the company would announce a joint venture in its Mississippi Lime operation over the next few months.

As per the presentation, CHK seems confident that it will sell or announce asset sales worth approximately $12 billion by the end of the third quarter of 2012, which will include the majority of its oil rich assets in the Permian Basin of Texas and its midstream business.

Long-term debt reported at the end of the second half of 2012 was recorded at $14 billion, and the company intends to reduce this debt to $9.5 billion by the end of 2012.

McClendon did not provide a detailed insight regarding the sales of assets, however, he did not rule out the possibility that the liquidation of some of the assets may spill over into the fourth quarter.

Outlook

CHK has increased the contribution of oil in its production mix, increasing it from 10% to 21%, as per the presentation at the energy conference. This is a positive sign for the company for two reasons; 1) it is shifting from being a pure natural play to a more balanced production portfolio, and 2) natural gas prices being depressed due to the supply hang while crude oil prices remain high will provide support to the company's profitability.

We maintain our positive stance on the stock given that the weather in the winter ahead will remain normal, the shift from gas to oil plays, and increased demand for natural gas will cause a rebound in natural gas prices, which is a prime contributor to the company's profitability.

However, its funding gap remains a concern, and the company is expected to liquidate some of its oil and gas producing assets to cover its funding gap of $4 billion for 2013.

The stock is trading at forward P/E, EV/EBITDA, P/B and P/S multiples of 15.5x, 5.4x, 0.9x and 1x, which are cheaper that the multiples offered by Range Resources Corp (NYSE:RRC), and at a premium when compared to the multiples of Devon Energy Corp (NYSE:DVN). The stock is offering the highest dividend yield amongst its peers mentioned below.

Name

P/E

EV/EBITDA

Dividend Yield

PEG

P/B

P/S

Chesapeake Energy Corp

15.5x

5.4x

1.7%

5

0.9x

1x

Range Resources Corp

60.7x

16.9x

0.2%

10.1

4.4x

8.5x

Devon Energy Corp

12.4x

4.2x

1.4%

3.3

1.1x

2.5x

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

Business relationship disclosure: The article has been written by Qineqt's Energy Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.