Chesapeake Energy’s Future Looks Brighter as Shale Operations Improve

Chesapeake Energy’s Future Looks Brighter as Shale Operations Improve

Chesapeake Energy Corporation (NYSE:CHK) has been in the news lately, over scandals by the CEO and some big investors buying stakes. Dan Loeb, CEO of Third Point, recently purchased Chespeake debt. Mason Hawkins of LongLeaf is the largest shareholder with close to a 15% stake, and legendary activist, Carl Icahn, owns close to a 10% stake. Mohnish Pabrai recently purchased a large stake in the company, as well.

Chesapeake Energy's Future Looks Brighter as Shale Operations Improve

Many question the company’s survival, but the company plans on asset sales and many analysts no longer think the Chesapeake Energy Corporation (NYSE:CHK) is headed for bankruptcy. The stock is currently trading at $19.73 a share, up from a low of $13 a share only several weeks ago.

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One of the Chesapeake Energy Corporation (NYSE:CHK) Bulls is Canaccord Genuity. Some of the positives about the company which they note include; improving liquidity, large asset sales, and the improvement of the company as a going concern. Below are some brief notes on the topic:

Permian sales add to target price

Our price target is unchanged at $26 as higher capital intensity given a
greater allocation toward liquids is offset by ~$5 billion of incremental
liquidity largely from the sale of most of the company’s Permian Basin assets
and a modestly higher liquids price realization.
Company executing on aggressive divestiture program
In H1/12, CHK generated $4.7 billion in proceeds from asset sales. In Q3/12,
the company anticipates a further $7 billion in proceeds, which includes
substantially all its midstream and Permian Basin assets. Late this year, CHK
expects to sell another ~$2 billion worth of properties that could include a
Mississippian JV, the DJ Basin properties (~500K net acres) and the Utica oil
window acreage (~340K net acres). Assuming CHK executes the ’12
divesture plan, net debt should be ~$8.5 billion or $1 billion less than the
year-end ’12 target of $9.5 billion.

Liquidity profile improving though still poses long-term challenge

In ’13, we anticipate Chesapeake should outspend cash flow by $4+ billion
and has established a goal of $4-$5 billion in projected asset sales to cover
the shortfall. Identified divesture assets include 30% stake in FTS
International (~$1billion), an IPO of up to 50% of the oilfield service company
(~$0.5 billion), another JV in the Utica Shale, and certain non-core and/or
non-cash-generating assets. Unfortunately, we estimate CHK will remain free
cash flow negative by $2+ billion per annum beyond next year.

Eagle Ford/Utica results middling, Power River Basin results encouraging

Eagle Ford wells have commenced on average at 500-1,000 Boepd and
recover 300+ Mboe (~80% liquids). Utica wells have peaked at an average of
~1,000 Boepd (~35% liquids), suggesting a recovery of 400+ Mboe. Select
Powder River Basin Niobrara tests have averaged ~2,000 Boepd (~75%
liquids), implying recoveries of ~800 Mboe.

Disclosure: No position in CHK

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