Chesapeake Energy: Trimmed Fat Makes For Handsome Returns

| About: Chesapeake Energy (CHK)
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Chesapeake Energy Corporation (NYSE:CHK) has a long and interesting history. For those who are unfamiliar with the name, the company has grown into one of the most prominent players in the US Nat Gas and US Oil markets. The company is the second largest US producer of natural gas and the most active driller of on-shore wells in the US. The company made it a very clear point to grow - at all costs possible - over the last decade, a spurt made clear by the following graph.

However, a quick glance at what is perhaps the most important portion of the graph reveals what happens all too often to an expanding empire, the organization became too leveraged to manage and too fatty to be run efficiently. The company's stock has come under a lot of pressure in the last few years when these factors combined with a drop in US Natural Gas prices to their lowest levels in history.

Luckily, the company's management recognized the issues at hand and shifted the ship's strategy in a complete about face. Over the last year or so, the company has begun the process of rapidly deleveraging itself, consistently cutting capex wherever possible, and transitioning to a portfolio of revenue more reliant on Nat Gas Liquids and oil than the more commonly known dry cousin. All of this has come at the beckoning of activist shareholders such as Carl Icahn. The company's most recent reports confirm that plans are proceeding as smoothly as one could possibly hope for. At the current share price of approximately $25, I believe that for the above reasons the company is an appealing investment for the duration of the next 3-5 years at least, and believe the company is poised for more positive growth in EPS.

Deleveraging and Reduction in Capex

At the core of the improvement in CHK's financial health is the company's newfound commitment to deleverage itself while cutting capex in a variety of places. The following slide from the company's most recent investor presentation details some key statistics that highlight the progress that has been made in this area.

CHK will continue this strategy and I believe it is a key reason the company will continue to improve bottom line EPS.

Focus on Oil and NGLs

The company's shift from a dry nat gas player to a more diversified driller does several very important things, from increasing margins to hedging exposure to the - volatile, yet improving - dry natural gas market. This is a major shift for the company from previous strategies, and the following slide details more statistics reflective of the continually improving trend here.

Furthermore, we see the newly found liquids focus is reflected in looking at the company's capex and exactly where it is going.

The Financials

With all that is being said and done at CHK, what we see is a picture of constantly - and rapidly - improving financial conditions for shareholders. This company has struggled and has often come under scrutiny for the high leverage and debt it has, however this new strategy is working.

The following shows some stunning analysis on recent shifts in realized revenues, related to the shift in recent strategy.

In addition, we see that the increased oil and NGL product mix is helping the margin numbers substantially as well.

All this can be summarized in the company's revised outlook for the remainder of the year.


CHK has a long history in the world of the US Nat Gas markets. Over the past decade, the company made it a very clear focus to expand at all costs possible and cement itself as the leader in the field, however, overextension threatened to cost the company its position. With recent shifts in its strategy, management has attempted to steer the ship back on track, and with the recent developments that have been implemented we are beginning to see a very nice picture come together, reflected in the company's recent operating results. Going forward, shareholders at these levels stand to be rewarded handsomely, particularly with possible rises in both oil and US Nat Gas prices. Chesapeake Energy Corp is as attractive an investment in the US Nat Gas and oil sector as Cameco Corp (NYSE:CCJ) is to the Uranium markets. If there has ever existed an exciting long play in the US Nat Gas markets, this is certainly it, and at the company's current share price, it is as good a time as ever to get in the mix.

This is a chance for investors to capitalize on terrific assets - the best in the industry - while benefiting from an increasing mix of liquids and oil, ultimately resulting in higher margins, EPS growth and high capital efficiency when paired with capex cuts. In addition, what capex remains is being strategically focused, and all of this will look even better as the US Nat Gas market continues to rebound off historic lows. CHK will position you well.

Disclosure: I am long CHK. 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.