Of all the oil patch bankruptcies of the past two years, Chesapeake Energy’s fall from grace has been one of the most public. Once touted as the leader of the North American shale revolution, Chesapeake’s decline has been well documented. Hamstrung by a mountain of debt and falling hydrocarbon prices, shares in Chesapeake have lost 86% of their value since the beginning of 2011.

Aubrey McClendon Chesapeake Energy Corporation Chesapeake Capital Jerry Parker'

Like many shale producers, Chesapeake is now struggling to stay alive, and management is concentrating on strategic initiatives to lower the company’s debt pile and return the group to profitable growth as investors become restless.

Unfortunately, Chesapeake’s management failed to appease investor concerns when it published second-quarter results at the end of last week.

The company announced lower than expected second-quarter earnings as a lower natural gas price outweighed higher production volumes. The company increased its 2016 production guidance while keeping CAPEX guidance in check but this didn’t stop the stock falling by 3.9% in early deals. On the upside, a couple of the company’s Haynesville wells were released that appear to be among the best gas wells seen in the US. No new strategic initiatives were announced.

Chesapeake Energy’s turnaround is just getting started

Despite the lackluster second quarter results release, Citigroup analysts Robert Morris and David Zutter believe that Chesapeake is heading in the right direction. Specifically, the duo is excited by the company’s progress on its commitment to improve liquidity through asset sales:

“With regard to liquidity, we’d highlight that: 1) Mgmt. Raised The Bar On Asset Sales with over $2.0bn now expected vs. prior guidance of $1.2-1.7bn and with 150k net Haynesville acres apparently teed up which we value at up to $1.25bn, and 2) A Halt in Working Capital Movements wherein Chesapeake announced an $81mm shift in Q2’16, significantly below the $684mm movement in Q1’16 though the Q2-ending cash balance was near zero.”

Citigroup’s Morris and Zutter are also impressed by Chesapeake’s raised exploration target and have upgraded production forecasts for the year:

“The 2016 capital budget is now expected to be at the high-end of $1.0-1.5bn E&P guidance (excl. capitalized interest) as Chesapeake intends to drill 100 more wells and complete an additional 75 wells than previously planned while keeping 10 rigs through the rest of the year. We are raising our full-year production forecast to 653 MBOE/d from 645 MBOE/d, slightly above guidance of 625-650 MBOE/d.”

Meanwhile, RBC’s Scott Hanold and team appear cautiously optimistic about Chesapeake’s outlook after the recent update.

Chesapeake: No funding issues

RBC’s team is extremely impressed with Chesapeake’s balance sheet improvement since 2015. The company has decreased debt by $3.1 billion since embarking on its turnaround but still needs to fulfill $2.2 billion of debt repayments in the next couple of years. Asset sales will fill some of this target. The company’s 150,000 net acres of its Haynesville position, producing 95 MMcf/d is only “lightly developed” so it should not meaningfully reduce cash flow when sold. The asset could fetch up to $500 million on the market.

Chesapeake’s Barnett assets could be another sale candidate for the company. RBC believes that this asset could be worth nearly $1 billion, enough to meet doubts about the company’s financial position for some time to come.

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At the end of the second quarter, Chesapeake had financial liquidity of $3.1 billion, which is enough to meet its debt obligations falling due during the next couple of years. However, the company remains reliant on a bank revolver and to reduce this dependence RBC believes a “ combination of asset sales, bank revolver availability, debt-for-equity exchanges, and/or capital markets transactions are likely options to address debt obligations.