Chesapeake Energy Corporation (NYSE:CHK)’s concentration in monetizing its midstream and other non-core assets is a positive for the company, as divestitures provide minimal change to its future earnings and cash flow potential, while unlocking significant cash/value, according to analysts at Wulderlich Securities.
The second largest natural gas producer in the United States recently announced its transition out of its midstream business, after the divestiture of its $2.75 billion midstream assets. The transaction includes the sale of five shale plays, worth $2.16 billion, to Access Midstream Partners before the end of the year.
Chesapeake Energy Corporation (NYSE:CHK) previously completed the sale of some of its midstream assets for $175 million and closed its $425 million target for the first quarter of FY13. The transaction allowed the company to sell its remaining midstream assets.
According to analysts at Wulderlich Securities, Chesapeake Energy Corporation (NYSE:CHK)’s divestiture of its three midstream assets would generate $4.875 billion in cash to help the company reduce its debts and fund its cash shortfalls, without drastically changing its operating business model.
The analysts also expect Chesapeake Energy Corporation (NYSE:CHK) to concentrate on developing a joint venture with Horizontal Mississippian and selling some of its non-core assets. They also expect the company’s oilfield business to go public.
In addition, the analysts believe that Chesapeake Energy is creating a lean, efficient, and financially strong company, as the company continues to implement its monetization program, which unlocks the value of its previous investments. According to them, the company’s move allows the company to become “more profitable with multiple-industry leading asset positions throughout prospective U.S. shale plays.”
In a research note to investors, the analysts wrote, “Chesapeake share have been under pressure since its 3Q12 results that discussed some delays in asset sales into 2013. These delays worried some investors, but the midstream divestitures should allow some confidence to return; and with natural gas prices above $3/mcf (if not above $3.50/mcf recently), we feel the added revenues, cash flows, EBITDA generated from the healthier gas prices if sustained at even just the $3/mcf level, show Chesapeake’s compelling potential value heading into 2013.”
The analysts reiterated their buy rating and $25 price target for the shares of Chesapeake Energy Corporation (NYSE:CHK).
On the other hand, analysts at JPMorgan Chase & Co. (NYSE:JPM) reiterated their underweight rating and $15.50 price target for the company. The analysts cited that the sale of Chesapeake’s midstream assets allows the company to avoid an immediate liquidity pinch, but the company still faces financial risk and its stock in not cheap based on valuations.