Chesapeake Energy Is A Buy Says Canccord, Despite Slow Debt Reduction

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Chesapeake Energy Corporation (NYSE:CHK)’s third quarter earnings report card was in line with the Wall Street’s expectations, with EPS at $0.10 versus the Street’s $0.09. Apart from the impairment charge of over $2 billion, due to low natural gas prices and leasehold impairments, the rest of the numbers were as expected.  The main focus, as had been for some time now, should be on the asset sale/debt reduction program, aimed to get debt under $9.5 billion.

Chesapeake Energy Is A Buy Says Canccord, Despite Slow Debt Reduction

The oil company has already put, Horizontal Mississippian, northern Eagle Ford, Utica, and other asset packages on the market to rationalize its portfolio. A report from Wunderlich believes the “company may not hit its bogey for the 2012 calendar year”, but it may achieve $17-$19 billion guidance for asset sales through 2013.  If the company is able to successfully manage these sales, then it might reduce the debt below the $9.5 billion mark and also fund cash flow shortfalls in 2013. The report expects the debt level to get below $9.5 billion mark in the first quarter of 2013, as “multiple transactions could occur in the next five months that add incremental cash”.

The energy company has also been able to reduce its rig count by 50 percent from 160 rigs in April to 89 rigs. This reduction will help the company in much lower capital spending levels, given the lower activity rates, allowing it to “get closer to cash flow neutrality”. The report from Wunderlich expects the company to maintain flat production levels in 2013, despite reducing the rig count. The report expects the oil production to grow over 20 percent and NGL production by 40 percent in 2013. While the company’s gas production may decline significantly, allowing “Chesapeake Energy Corporation (NYSE:CHK) to take advantage of the better pricing/economics of liquids and better diversifying the production stream for the future”.

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Another report, from Canccord, expects Chesapeake Energy Corporation (NYSE:CHK) to generate another $4-$5 billion of divestiture proceeds in 2013, including a 30 percent stake in FTS International, an IPO of up to 50 percent in the oilfield service company, and a JV in the dry gas portion of the Utica Shale. Achieving such numbers is ‘highly optimistic’, but if the company reaches the near-term goal of $2.5-$3 billion in proceeds, “our analysis suggests the company’s net debt-to-EBITDA should remain modestly under 3x through ‘17, even as Chesapeake Energy Corporation (NYSE:CHK) remains almost $2 billion free cash flow negative each year”.

Wunderlich’s report reiterates a ‘Buy’ rating for the stock, with a price target of $25, as it believes “While most natural gas names have run along with the price of the commodity, Chesapeake Energy Corporation (NYSE:CHK) has not received that boost yet”. Canccord also gives a ‘Buy’ rating, with a price target of $29 “due to lower operating/production tax expense”.



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