Is Chesapeake A Good Long-Term Investment Opportunity?

| About: Chesapeake Energy (CHK)
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Chesapeake (NYSE:CHK) has been pursuing a brief strategy by focusing on two primary goals: the reduction of galloping debt while increasing production. Let us determine whether or not these strategies will be successful for the company and if so what this means for investors in the future.

Increasing Production By Operating One of the Best Shales

Chesapeake is one of the largest independent exploration and production companies in the U.S. The company discovers and develops oil and gas, with key operations in the country's top shale plays. The details of key shale plays for natural gas and liquids can be seen in the table below.

All of the shales are considered to be among the most efficient and prominent shales. It is worth mentioning here that natural gas accounts for 80% of the company's proved reserves of oil and gas. The increased production during the third quarter of 2013 was primarily attributed to the Eagle Ford Shale but the Utica, Mississippi and Marcellus shales also contributed to the increase in production.

However, as disclosed in the company's investors presentation and based on its performance during the first three quarters of 2013, it can be estimated that the company's natural gas production may reach 260 Bcf, which is a 7% drop from the same quarter of the previous year. On the other hand, the price of natural gas is most likely to be 2% higher than last year. The increase in the price of natural gas is mainly attributed to the shift of utilities from coal to natural gas. So the net effect on Chesapeake will be a decrease of roughly 5% in revenues from natural gas.

Utica & Eagle Ford Shale will Lead the Market

Eagle Ford Shale has been producing an average of about 95,000 barrels of oil per day during the third quarter of 2013.This represents an 82% increase from last year. Eagle Ford's production consists of 60% oil, 12% LG and 20% natural gas. Chesapeake currently has 788 producing wells and 117 wells are in various stages of completion. The completion of these wells will further strengthen the production base of the company but significant strength is expected from the Utica shale. Now let us discuss Chesapeake's future prospects thanks to the Utica Shale.

Chesapeake Energy was one of the first companies to commence operations in the Utica Shale and is currently the largest and most active leaseholder in the region. The company obtains a majority of its gas production from this play. During the third quarter of 2013the natural gas production from the Utica shale grew 91% from the previous quarter. Chesapeake delivered 165 million cubic feet of natural gas equivalent per day while the previous quarter's net production was 85mmcfe per day. Chesapeake drilled 377 wells in the Utica play169 of which are producing wells while the remaining 208 wells are in various stages of completion and are expected to be completed in the next quarters.

During the third quarter, Chesapeake operated 11 drilling rigs in the Utica Shale and connected 63 wells to sales. Although in its 2013 outlook the company stated to have expected a production of 330 mmcfe per day in my opinion the company can do slightly better than that. In addition, only 15% of the 300+ wells currently in place are connected and producing due to the lack of infrastructure. Currently, the company has undertaken an $8 billion infrastructure project which is expected to be completed in two years' time. Soon after these assets begin to function the bottom line will increase by a significant percentage.

Reducing Debt

Chesapeake has reduced its long term debt by $3.02 billion from $15.75 billion to $12.73 billion. The company has sold $3.6 billion in assets during the first three quarters of 2013 and plans to realize $600 million by selling assets during the fourth quarter. The company has been shedding assets to reduce debt and improve liquidity. In addition, the company also expects to sell more than $4 billion in assets.

Concluding Remarks

Chesapeake has been improving from within. The company has sold $3.6 billion in non-core assets which resulted in a reduction of the long term debt by $3.2 billion. Similarly, improvements have been made on the production front as well. The company increased production by 23 percent. Moreover, in an effort to right size the company has reduced its workforce by 20percent. The lower cost will allow Chesapeake to operate more efficiently and the increasing margins will allow it to improve bottom line growth.

The company has been operating in the country's top shale plays but the distinctive position of the company in the Utica shale will significantly increase the production.

Based on the arguments above I believe Chesapeake Energy offers a winning combination for the investor who is looking for a long-term investment. The company has been successfully selling non-core assets and also continues to reduce its capital expenditures. Also, its increased production will contribute to an increase in its profitability.

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.