Barclays has reinstated their rating on Chesapeake Energy Corporation (NYSE:CHK) at equal weight with a price target of $24. The firm believes that continued progress in strengthening the company’s financial position through asset sales should allow management to turn its attention from addressing balance sheet and liquidity concerns through much of 2012 to driving production and reserve growth from its key liquids plays in 2013.
Chesapeake Energy Corporation (NYSE:CHK) reported fourth quarter earnings today. Fourth quarter asset sales strengthened Chesapeake’s balance sheet and liquidity position. Additional debt reduction planned for 2013 – Chesapeake Energy Corporation (NYSE:CHK) closed ~$5 billion of divestitures in 4Q12, including the sale of substantially all of its remaining midstream assets, bringing total asset sales in 2012 to ~$11.4 billion (below management’s target of $13 – $14 billion). Barclays estimates that net debt fell to $12.4 billion at YE12 from $16.2 billion at the end of 3Q12. Management remains committed to further reducing net debt to $9.5 billion in 2013. Chesapeake Energy Corporation (NYSE:CHK) exited 2012 with more than $4 billion of total liquidity.
Capital program remains focused on growing volumes in liquids-oriented plays – FY13 production guidance stands at 3.895 Bcfe/d, flat to guidance of 3.87 Bcfe/d in 2012. Liquids volumes are expected to grow ~30% y-o-y and comprise ~26% of FY13 volumes, up from ~20% in 2012. The Eagle Ford, Marcellus, Mississippi Lime, Cleveland Tonkawa, and Granite Wash accounted for 35% of 3Q12 production and grew 16% sequentially. The analysts expect a greater contribution from the Utica Shale later this year.
A significant decrease in capital expenditures should help to narrow the gap between cash sources and uses in 2013. The analysts believe asset sales will continue to play a key role in funding the capital program – Management expects total expenditures in 2013 to be in the neighborhood of $7.5 billion, down from ~$13 billion in 2012. Barclays estimates that Chesapeake Energy Corporation (NYSE:CHK) will incur a cash flow deficit of ~$4.2 billion to fund anticipated capital outlays in 2013. Management continues to pursue a sale of its Mississippi Lime assets and will likely evaluate a broad spectrum of additional monetization opportunities.
At the Credit Suisse energy conference yesterday the company discussed the core assets (which likely will not be sold):
Our asset base that we have today is focused on 10 key plays. We certainly believe that the Bakken is a fantastic play as well as the Downdip Eagle Ford, but we think the collection of assets that we’ve put in place are some of the very best in the industry. Our portfolio is fairly large, and part of what we will accomplish over the next several quarters is reducing the size of this portfolio by selling selected assets, some of which will be in plays that we simply don’t have the capital to develop as soon as we would like, and they’ll be more valuable to other companies than to us. And we’ll also continue to focus on trimming some of the noncore acreage as well.
Of our liquids budget, the vast majority will be directed to the Eagle Ford Shale play that represents nearly a third of our planned capital expenditures for the year in the Eagle Ford. The Utica Shale and the Cleveland Tonkawa play each represent about 10% of our overall spending, and the remaining — I guess that would be two-thirds of our capital expenditures would be fairly evenly spread across several different liquids plays.